Stretch IRA

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A stretch IRA is not a product, but a rule which applies to all types of accounts--traditional, Roth SEP, or SIMPLE. The term "stretch" was cooked-up by the financial planning community. The correct IRS term is lifetime distributions.

When an account owner dies, one option available to all beneficiaries is to take lifetime distributions. In English this means that the payments are based on the beneficiary's life expectancy. Life expectancy is determined from a table published by the IRS. There are several tables, but beneficiaries can only use one table--the single life table.

Most individuals understand that if one takes a distribution, these funds are included in income. Since we operate under the "Robin Hood" or progressive tax system the more income you report, the higher your tax bracket.

Assume that a beneficiary, age 20 inherits the account. From the single life table the life expectancy is 63. This means that the beneficiary is allowed to take 1/63rd of the account each tax year. Obviously, this is much better tax strategy than taking a total distribution.

This option is not automatic. In order to use this option there must be at least one living, breathing human being named on an IRA beneficiary designation form. I repeat: In order to use this option there must be at least one living, breathing human being named on an beneficiary designation form. Wills don't count. In some situations the beneficiaries of a trust may count, but for the average owner trusts make no sense.

Form more detailed information try:
Retirement Distributions

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