Diving Into A Stretch IRA

As we move from the pension era of retirement planning to the self-directed era, IRAs and other retirement accounts are becoming a larger part of many estates.  It’s not uncommon anymore to have a client with more than half of their estate parked in IRAs.  If that’s the case for you (or will be as time goes on), then the concept of a Stretch IRA is important to understand.

When a non-spousal beneficiary – that’s anyone besides your current wife or husband at the time of your death – inherits your IRA, they have two options.  They can either take a lump sum distributions (all of it, at once, in a big check, paying all of the income taxes up front) or continue the IRA.  Continuing the IRA – letting the funds grow while taking annual distributions – is also called “stretching”, and the continued IRA is what we call a “Stretch IRA”.

So if you inherited an IRA from your parent and “stretched it”, the resulting Stretch IRA continues the account as a “Beneficiary IRA”.  You would be required to continue taking required minimum distributions (RMDs) each year from the IRA, but when you stretch an IRA, the RMD table resets to your current age and your actual distributions would be smaller.  The trick of the Stretch IRA is that the longer the money stays in the IRA, the more it can grow.

Let’s look at an example.


This chart begins with a $500,000 IRA. The owner, Bob, was born in 1945 and dies at age 80 in 2025.  Bob’s transactions are labeled in BLUE, and you can see he took RMDs totaling $245,000.  Bob’s child, Alice, then inherits the IRA, takes a Stretch IRA, and also lives until 80.  Assuming the IRA grows at 6% a year (it will vary in reality), Alice would collect almost $2 MILLION during her lifetime. 

Conversely, if Alex took a lump sum, she would pay almost 39.6% in income taxes, and be left with about $300,000.  That $300,000 would then be subjected to ordinary income and capital gains taxes.  That’s a far cry from the $2 million provided in the Stretch scenario.

If you’re looking for protection to ensure your heirs actually take the stretch, consider wrapping your IRA into an IRA Trust.  An IRA Trust puts a layer of instruction and protection around your IRA, ensures your heirs stretch the IRA rather than take the lump sum, and also creates a legacy by incorporating bloodline protection for your IRA. 

The example with Bob and Alice is just one of many scenarios we can run, but I wanted to give you an idea of what a “Stretch IRA” actually looks like. If you’re interested in learning more, give my office a call today to schedule an appointment at (215) 706-0200.