I’m 72 years old, retired and my oldest daughter is raising her three kids on her own. I want to make sure that any funds left over in my IRA go to her and not to the IRS. You mentioned in The RichLife book that taking a lump sum distribution when you inherit an IRA can result in a large tax burden. I keep hearing about Stretch IRAs. What are they and how can I get set one up for my daughter?
Inherited IRAS
Imagine if there was a way you could set up your IRA so that 30 years from now, your grandchildren were still receiving that money. A Stretch IRA is not a new or different kind of IRA, but rather a different way to distribute the funds. This is a very big deal when it comes to traditional IRAs because the money put into those is tax-deferred.
What does that mean? It means that when you put the money in the IRA, you did so BEFORE paying taxes. This is a great way to encourage savings, but when your daughter inherits that money, those taxes still need to be paid. If she elects to take the lump sum option, not only will she owe your share of the taxes, but the distribution will also likely put her in a higher tax bracket, meaning she’ll owe even more taxes.
Stretch IRA Option
This can be avoided with the Stretch option.
When your daughter inherits your IRA, as a non-spousal beneficiary, she will be required to take distributions out within five years of inheriting the money unless she chooses the Stretch distribution option. This option will stretch out the distributions – or payment – over her lifetime. Any taxes owed will also be stretched out. Meanwhile, the money in the IRA will continue to grow. It is essentially a way to provide regular income payments to your loved ones when you no longer need the income yourself.
Any IRA can be stretched. As the owner of the IRA, you can to elect the Stretch distribution option for your beneficiaries ahead of time in order to avoid any confusion. Contact your advisor today and ask about legacy planning to protect your loved ones or contact one of our qualified advisors at RichLifeFinancial.com for a complimentary financial overview. We provide this service at no cost to you but the benefits to your loved ones could be huge.
Bottom line: Electing a Stretch IRA option can protect your beneficiaries from a heavy tax burden and provide them with income for years to come.
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