What Is a “Stretch” IRA?2Extending Retirement Assets: A "Stretch" IRA Reviewuntil, that is, the funds are actually distributed, at whichtime income tax must be paid on the amount of thedistribution from a traditional IRA.A major benefit of an IRA is that there isno federal income tax paid on the growthin the IRATraditional IRA tax deferral, however, cannot continue indefinitely. Federal tax law requires thatdistributions from a traditional IRA must begin no later than April 1 of the year following the year inwhich the IRA owner reaches age 70-1/2, whether or not the IRA owner has retired.Over a period of years, this tax deferral can contribute to the accumulation ofsignificant funds in an IRA.What if the owner of atraditional IRA hassufficient retirementincome and, rather thantaking IRA distributions,would prefer to leave theIRA to his or her heirs?If the owner of a traditional IRA has sufficient retirement incomewithout the need to take IRA distributions above the requiredminimum distributions, a "stretch" IRA might be the answer.A "stretch" IRA is not a special type of IRA…instead it is a wealthplanning strategy with the objective of stretching the amount oftime during which traditional IRA assets have the opportunity tocontinue growing on a tax-deferred basis inside of the IRA.
How Are Required Minimum Distributions Calculated?3Extending Retirement Assets: A "Stretch" IRA ReviewIRS regulations include a "Uniform Lifetime Table" that is generally used to calculate the requiredminimum distributions that must be made from traditional IRAs beginning at age 70-1/2.Step 1Account balance as of the previousDecember 31:continued on next slideTo calculate your annual required minimum distribution, follow these simple steps:Distribution period factor based on ageas of December 31 in the year for whichthe distribution is being calculated:Step 2Divide Step 1 by Step 2; the result is theannual required minimum distributionfor the year:Step 3$$200,000$$Example:25.67,812.50
How Are Required Minimum Distributions Calculated?4Extending Retirement Assets: A "Stretch" IRA ReviewUniform Lifetime TableAgeDistributionPeriod Factor70 27.471 26.572 25.673 24.774 23.875 22.976 22.077 21.278 20.379 19.5AgeDistributionPeriod Factor80 18.781 17.982 17.183 16.384 15.585 14.886 14.187 13.488 12.789 12.0AgeDistributionPeriod Factor90 11.491 10.892 10.293 9.694 9.195 8.696 8.197 7.698 7.199 6.7AgeDistributionPeriod Factor100 6.3101 5.9102 5.5103 5.2104 4.9105 4.5106 4.2107 3.9108 3.7109 3.4AgeDistributionPeriod Factor110 3.1111 2.9112 2.6113 2.4114 2.1>114 1.9NOTE: Non-deductibleRoth IRAs are notsubject to minimumdistributionrequirements.EXCEPTION: If your beneficiary is your spouse who is more than 10 years younger than you, instead of this table you can use theactual joint life expectancy of you and your spouse from the IRS Joint and Last Survivor Table to calculate required minimumdistributions.
Other Traditional IRA Minimum Distribution Requirements5Extending Retirement Assets: A "Stretch" IRA ReviewWhen Must Required Minimum Distributions Begin?Required minimum distributions must begin no later than April 1 of the year following theyear in which you reach age 70-1/2 and must continue each year thereafter. If you wait untilthe year following the year in which you reach age 70-1/2, you must receive a minimumdistribution on behalf of the previous year by April 1 of the current year, and a minimumdistribution on behalf of the current year by December 31 of that year.What Happens if Minimum Distribution Requirements Are Not Met?If the amount distributed from a traditional IRA is less than the minimum distributionrequired in any calendar year, a penalty tax equal to 50% of the amount by which the actualdistribution falls short of the required minimum distribution is imposed.For example, if the required minimum distribution for a calendar year is $20,000, but only$12,000 is actually distributed from the IRA, a penalty tax of $4,000 must be paid ($20,000 -$12,000 = $8,000 x 50%)…an outcome to be avoided!continued on next slide
Other Traditional IRA Minimum Distribution Requirements6Extending Retirement Assets: A "Stretch" IRA ReviewAre There IRA Reporting Requirements?Yes, financial institutions must report IRA required minimum distribution amounts to theIRS.Traditional IRAs have minimum distribution requirements during the owners lifetime.Roth IRAs, on the other hand, have no date by which distributions must begin duringthe owners lifetime. Both have distribution requirements that come into effect at theIRA owners death.NOTE:
What Is the Impact of Lifetime Required Minimum Distributions?7Extending Retirement Assets: A "Stretch" IRA ReviewThe objective of the required minimum distribution rule is to ensure that the entire value of atraditional IRA will be distributed over the IRA owners life expectancy. Basing distributions on lifeexpectancy, however, allows required minimum distributions to be spread over a significantnumber of years, during which the assets remaining in the IRA continue to grow on a tax-deferredbasis.Lets look at an example.Assuming the IRA account balance is $500,000 when required minimum distributions must begin and theaccount owner is age 71, the following is the impact on the IRA account balance of taking only therequired minimum distribution each year, assuming the remaining account balance earns 5%(1) and thatthe required minimum distribution is taken on December 31 of each year.While this is a hypothetical example, it does illustrate how a traditional IRA can continue to grow invalue, despite the payment of required minimum distributions. In our example, the IRA ownerreceives over $392,000 in distributions through age 85, at which point the IRA value first dropsbelow its original value of $500,000.It is important to understand, however, that IRA income and growth is dependent on the actualrate of return of the underlying investments that fund the IRA, as well as the length of time themoney is invested…rates of return vary over time, particularly for long-term investments.
What Is the Impact of Lifetime Required Minimum Distributions?8Extending Retirement Assets: A "Stretch" IRA ReviewYearBeginning IRABalance(2) AgeEnding IRABalance(3)Required MinimumDistribution (4)1 $500,000 71 $525,000 $18,8682 $506,132 72 $531,439 $19,7713 $511,668 73 $537,251 $20,7154 $516,536 74 $542,363 $21,7035 $520,660 75 $546,693 $22,73610 $527,542 80 $553,919 $28,21115 $504,875 85 $530,119 $34,11316 $496,006 Total Distributions: $392,6241 For illustration purposes only; is not indicative of the actual performance of any particular investment and does not reflect thefees and expenses associated with any particular investment, which would reduce the performance shown in this hypotheticalillustration if they were included. In addition, rates of return will vary over time, particularly for longer-term investments.2 As of December 31 of the previous year, after subtracting that years required minimum distribution3 As of December 31 of the current year4 Assumes that the required minimum distribution is taken on December 31 of each year
Naming an IRA Beneficiary9Extending Retirement Assets: A "Stretch" IRA ReviewWhen you open an IRA account, you are asked to name a beneficiary or beneficiaries to receivethe value of the IRA at your death. You can also change beneficiaries during your lifetime. Thereare generally three classes of beneficiaries:A primary beneficiary is your first choice of who you want to receivethe IRA value at your death.Primary BeneficiariesA secondary beneficiary receives the IRA value if your primarybeneficiary does not survive you.Secondary BeneficiariesA final beneficiary receives the IRA value if none of your primary orsecondary beneficiaries survive you.Final BeneficiariesIf you do not have a named beneficiary who survives you, your estate becomes the beneficiary,which may produce less advantageous tax and distribution outcomes.If youre married, you can name your spouse as your IRA beneficiary. Alternatively, you can namemultiple beneficiaries. If, for example, you have three children, you could name them as the threeprimary beneficiaries, specifying the percentage of the IRA each will receive. Or, you could nameyour spouse as the primary beneficiary and your children as the secondary beneficiaries.continued on next slide
Naming an IRA Beneficiary10Extending Retirement Assets: A "Stretch" IRA ReviewKeep in mind that a spouse who is the sole beneficiary of an IRA has the option of treating theInherited IRA as his/her own, meaning that the assets in the Inherited IRA need not be distributedprior to the surviving spouse attaining age 70-1/2.If you have several IRAs, you can name different beneficiaries for each IRA. If you have both atraditional IRA and a Roth IRA, however, keep in mind the different income tax treatment of thesetwo types of IRAs: the beneficiary of a traditional IRA will have to pay income tax on IRAdistributions, while the beneficiary of a Roth IRA will receive distributions income tax free.Certain situations require special care in designating IRA beneficiaries. Theseinclude marriages in which one or both spouses have children from a priormarriage, as well as a child or grandchild with a disability or a drug or alcoholproblem that might impair their judgment or use of funds from the IRA. Inthis situation, naming a trust as beneficiary can establish some control overhow the funds are used after your death.CAUTION:
What Happens at a Traditional IRA Owner’s Death?11Extending Retirement Assets: A "Stretch" IRA Review1 Immediate Lump-Sum DistributionHeres where "stretch" IRA planning can come into play. Required minimum distributions from atraditional IRA cannot be avoided during your lifetime. As illustrated by our earlier example,however, required minimum distributions do not necessarily deplete the value of a traditional IRA.Instead, the value remaining can be substantial at an IRA owners death, when careful advanceplanning can serve to stretch the tax deferral into the future.The options available to an individual who inherits a traditional IRA include the following:Surrender the inherited IRA and receive the entire value in a lump sum. The taxable value of theIRA is then included in the beneficiarys income in the year of surrender.2 Distributions Over Five YearsIf the IRA owner was under age 70-1/2 at death, the beneficiary can take any amounts from theinherited IRA, so long as all of the funds are distributed by December 31 of the year containing thefifth anniversary of the original IRA owners death. This option is not available if the IRA ownerwas over age 70-1/2 at death.continued on next slide
What Happens at a Traditional IRA Owner’s Death?12Extending Retirement Assets: A "Stretch" IRA Review3 Life ExpectancyThe IRA assets are transferred to an inherited IRA in the beneficiary’s name, where the date bywhich required minimum distributions must begin depends on whether or not the beneficiary isthe surviving spouse and by the IRA owner’s age at the time of death.continued on next slideFor spouse beneficiariesIf the deceased spouse was younger than age 70-1/2 at the time of death, the surviving spouse maydelay required minimum distributions until the year in which the deceased spouse would havereached age 70-1/2.If the deceased spouse was older than age 70-1/2 at the time of death, the surviving spouse mustbegin taking required minimum distributions by December 31 of the year following the spouse’sdeath.For non-spouse beneficiariesRequired minimum distributions from the inherited IRA can be spread over the non-spousebeneficiarys life expectancy, with the first payment required to begin no later than December 31of the year following the year of the IRA owners death.
What Happens at a Traditional IRA Owner’s Death?13Extending Retirement Assets: A "Stretch" IRA Review4 Spousal TransferUnder this option available only to surviving spouses who are the sole IRA beneficiary, the spousebeneficiary treats the inherited IRA as his/her own and the IRA assets continue to grow tax-deferred. IRA distribution rules are then based on the spouse’s age, meaning that distributionsmay not be available prior to the spouse’s age 59-1/2 without paying a penalty tax and requiredminimum distributions must begin by the spouse’s age 70-1/2.With a spousal transfer, a surviving spouse who does not need current income can continue thetax-deferred growth of the entire Inherited IRA until he/she reaches age 70-1/2.continued on next slideThe life expectancy option can be used to provide a current stream of income, while stillextending the tax deferral of funds in the Inherited IRA by stretching the required minimumdistributions over the beneficiarys life expectancy…potentially a long period of time in the case ofa younger beneficiary.Spouse IRA beneficiaries, however, have an additional option to consider:
What Happens at a Traditional IRA Owner’s Death?14Extending Retirement Assets: A "Stretch" IRA ReviewSince Roth IRAs have no required beginning date and no required minimumdistributions, a Roth IRA owner is not required to take distributions from a Roth IRA during his/herlifetime. At the Roth IRA owner’s death, a spouse beneficiary can treat the Roth IRA as his/herown and continue to defer distributions indefinitely into the future. Alternatively, a spouse ornon-spouse Roth IRA beneficiary can transfer the assets to an Inherited IRA and elect the lifeexpectancy method, which does have minimum distribution requirements:NOTE:Required minimum distributions based on the beneficiary’s life expectancy must begin no later thanDecember 31 of the year following the year of the deceased Roth IRA owner’s death.For non-spouse beneficiariesLets look at several hypothetical examples using a traditional IRA…Required minimum distributions may be postponed until the year in which the deceased Roth IRA ownerwould have reached age 70-1/2.For a spouse who is the sole IRA beneficiary
“Stretch” IRA in Action: Spouse as Beneficiary of Traditional IRA15Extending Retirement Assets: A "Stretch" IRA ReviewSpouse named asbeneficiary.Required minimumdistributions mustbegin no later thanage 70-1/2.During TraditionalIRA Owners Life:Surviving spouse, age 65, inherits theIRA, which she treats as her own, namingher three children as equal beneficiaries.Required minimum distributions mustbegin no later than age 70-1/2.Owner Dies at Age 74:Surviving spouse, age 65, inherits theIRA, which she splits into three separateIRAs, naming each of her three childrenas beneficiary of an IRA.Required minimum distributions mustbegin no later than her age 70-1/2.The three children, ages 45, 48 and50, inherit the IRA.Required minimum distributionsbased on the life expectancy of the50-year-old child begin to all threechildren.The three children, ages 45, 48 and50, separately inherit an IRA.Required minimum distributionsare made from each Inherited IRAto each child beneficiary, based onthat child’s life expectancy.Surviving Spouse Dies at Age 78:It is important that IRA beneficiaries name their own beneficiaries. In our example, what would happen if the 48-year-old beneficiary died in 10 years, with value remaining in his IRA?Unless he had named a beneficiary or beneficiaries, such as his spouse or children, the remaining IRA proceeds wouldbe paid to his estate, with potentially less favorable taxation and distribution results.or
“Stretch” IRA in Action: Non-Spouse as Beneficiary of Traditional IRA16Extending Retirement Assets: A "Stretch" IRA ReviewAdult child named as beneficiary.Required minimum distributions must begin no later thanIRA owners age 70-1/2.DuringTraditional IRAOwners Life:Adult child, age 35, inherits the IRA, transfers the assets toan Inherited IRA and names her spouse as primarybeneficiary with her children as secondary beneficiariesRequired minimum distributions based on her lifeexpectancy must begin no later than December 31 of theyear following the year of the IRA owner’s deathOwner Dies atAge 65:The beneficiarys spouse inherits the IRA, transfers theassets to an Inherited IRA and names the couple’s childrenas beneficiariesRequired minimum distributions continue, based on thebeneficiarys spouse’s life expectancyBeneficiaryDies at Age 60:As the spouse andnon-spouse examplesillustrate, if"stretching out" anIRA is the objective, itis important that theIRA trust or custodialdocuments usedcontain languagethat permits thefollowing:- Distributions paidto beneficiaries overtheir lifeexpectancies;- Division of an IRAinto multipleseparate IRAs; and- The naming ofsuccessorbeneficiaries.
“Stretch” IRA Advantages and Disadvantages17Extending Retirement Assets: A "Stretch" IRA ReviewAdvantages: Disadvantages:If you will have no need to take money from your IRA above and beyond the required minimumdistributions, evaluate these advantages and disadvantages in deciding if a "stretch" IRA is rightfor you.The possibility of providing income to oneor more generations.The ability to continue the tax-deferredgrowth of IRA assets during the period oftime that distributions are being made.The opportunity to minimize income taxliability by spreading it out over a periodof years instead of paying it all at once.Future tax laws and/or regulations maymake IRA growth and/or taxation lessadvantageous to the beneficiaries.Inflation and/or poor investment returnsmay erode the value of future IRAdistributions.An IRA beneficiary may elect to "take themoney and run," opting for a lump-sumdistribution at an IRA owners death.continued on next slide
“Stretch” IRA Recommendation18Extending Retirement Assets: A "Stretch" IRA ReviewIt is strongly recommended that you obtain professional tax and legal guidance in structuring a"stretch" IRA in order to fully evaluate:The fees and expenses associated with a "stretch" IRA and its underlying investments.Any tax limitations or withdrawal restrictions in the investment(s) used to fund the IRA.The possibility that future changes in tax laws and/or IRS rules may impact required IRAdistributions and/or IRA taxation.The impact of inflation, which will erode the future purchasing power of an IRA.The inability to accurately project future investment results over a long period of time, as wellas the market risk inherent in exposing IRA assets to a lengthy distribution period.The impact of a "stretch" IRA on your overall estate plan, including the inability to predictwhen IRA beneficiaries will die.