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Stretch IRA's –
What are they and are they for everbody?

By: Albert J Isacks, CPA, MBA, CSEP
      Director of Estate Services
      Malin, Bergquist & Company, LLP
      Past President, Estate Planning Council of Erie

Everyone has probably heard the term “Stretch IRA”. A stretch IRA allows you to provide your beneficiaries, upon your death, with the longest allowable period of tax deferral before all of the assets in the IRA must be distributed to them. In some limited situations, this may mean that you should name your children as the beneficiary and not the surviving spouse.

First and foremost, a “Stretch IRA” is only applicable to an IRA, it does not apply to pension plans, profit sharing plans or 401(k) plans. This can be a very critical item, since if an individual dies while they have a significant balance in a qualified plan (pension, profit sharing etc.) and unless the beneficiary is the surviving spouse, the money may need to be withdrawn in a lump sum rather than paid out over a period of years.

Beginning at age 70 ½, the tax laws require that certain minimum amounts must be withdrawn annually. A “Stretch IRA” is used over both the life expectancy of the individual and that of the child to maximize the period of time over which distributions may be made. For example, a parent age 80 is required to withdraw 5.34% of the balance of their IRA. Each year the percentage will increase. At age 90, the percentage is 9.26%. However, upon the parent’s death, the children (assuming child is age 65) can stretch out the remaining balance over 21 years. Hence the name “Stretch IRA”.

But is a “Stretch IRA” for everyone? The answer is “it depends”. It depends on whether the money is needed to live on . If the money is required to pay everyday bills, there is no reason to consider a “Stretch IRA”. But if it is not, then a “Stretch IRA” is something to consider.

Another possibility, is if the money is still in an employer plan (profit sharing or 401(k)) that holds employer securities (such as GE) then at that point if the money is not going to be rolled over into an IRA (i.e. – used to buy a house or pay off bills) it may be worthwhile to take the employer securities and sell them if necessary to create a smaller tax bill.

As always, proper tax planning is the key to insuring that you and your heirs keep the most of your hard earned dollars. Contact a professional to see if the stretch strategy makes sense for you.