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The Portfolio Doctor

My blog provides valuable insights into Nobel Prize-winning financial strategies for investors. By utilizing decades of worldwide peer-reviewed capital markets research and analysis, I demonstrate how to build better investment portfolios with lower risks. I also examine common financial media misinformation and how investors can make better financial decisions.

How a Stretch IRA can Help Fund Your Wealth Transfer

For many wealthy investors finding new avenues to increase the amount of assets they can leave to their loved ones is important to the goals that they have set in a wealth transfer plan. An interesting strategy for facilitating this is referred to as a “stretch IRA”. The method designates beneficiaries with the longest life expectancy so that that the Required Minimum Distribution (RMD) is lower. In implementing this strategy the base asset is larger for a longer period of time, which will help it grow more quickly.

Factors to Consider

It is imperative to consider vital components before settling on this sort of choice:

  • If you need to withdraw more than the RMD amount, review how much the projected remainder of your IRA will be in the future.
  • If you are married, you may still wish to implement this strategy, but list your spouse as the primary beneficiary and then, those in later generations as secondary beneficiaries.

When making the choice to implement this strategy, the process of doing it is fairly straightforward. You name one or more individuals with the longest life expectancy as beneficiaries. Ideally, you would take only the required minimum distributions during your lifetime. This will leave the largest remainder possible to grow tax-deferred while you’re still alive.

Distribution Options for Beneficiaries

Depending on whether your beneficiaries are spousal or non-spousal and whether or not you had begun taking RMDs, beneficiaries will have several options for distribution from their inherited IRA.

They May Include:

  • Taking a lump sum
  • Transferring the account balance to an inherited IRA with a five-year time limit to start distributions
  • Transferring the account balance to an inherited IRA that will distribute assets according to the beneficiary's life expectancy.

Spousal beneficiaries have the additional option of requesting a spousal transfer, which allows them to roll over the account balance into an IRA in his or her own name. In some cases, this makes a great deal of sense, such as when the original account owner had not yet begun taking RMDs and the surviving spouse has not yet turned 59 ½.

The Benefit of a Roth IRA

Stretching an IRA can be even more effective if you contribute to a Roth IRA. Roth IRA contributions are not tax-deductible, your investments grow tax-free, earnings can be withdrawn income-tax-free if you're at least 59½ and have had the Roth at least five years, and there are no RMDs at age 70½. Because of these benefits, using a Roth IRA for your stretch IRA strategy may be a smart choice if you have significant IRA balances that you don't plan to tap during your lifetime.

An added benefit for beneficiaries, especially spouses, is that they receive the money tax free. Spouses essentially are able to treat the Roth IRA as if they were the original owner because they not only do not have to pay taxes on it, but they are not required to take distributions either. For non-spousal beneficiaries, they are required to take minimum withdrawals, however, they still benefit from the tax-free withdrawal.

Change is Conceivable

As with any estate-planning technique, your plans—and the tax laws—may evolve over time. All IRAs give you the flexibility to begin taking penalty-free distributions as early as age 59½. In addition, you can change the beneficiary at any time should your beneficiary's needs change or if you decide to use a different wealth-planning strategy.

If your ultimate goal is preserving wealth for future generations, a stretch IRA strategy will generally allow you to grow your assets for a longer period of time and allow them to continue to grow after you pass. As always, you should consult a professional tax advisor or attorney to discuss your specific circumstances. For more information on estate planning, wealth transfers and other financial planning strategies, contact  This email address is being protected from spambots. You need JavaScript enabled to view it..

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