In the financial and estate planning world, stretch IRAs can be important for flexibility as well. When an IRA is stretched, that means it can be passed from one generation to the next – and even to a third or fourth generation - while growing in a tax-free or tax-deferred environment.
How does the stretch work?
When an IRA account owner dies, the beneficiary(s) are eligible to re-title the account(s) as inherited IRA(s). Each beneficiary can then then begin taking Required Minimum Distributions based on their OWN ages, rather than having to take the entire sum all at once and paying tax on the balance.
“The stretch IRA, when implemented properly, can be one of the great vehicles for transferring wealth to your heirs, maintaining the tax-deferred status of the bulk of your account until much later,” says Jim Blankenship, writing in Forbes. Blankenship lists some common mistakes people make with stretch IRAs, including:
1. Not properly titling the account.
The title should read “John Doe IRA (deceased Jan. 1, 2009) FBO Janie Brown”.
2. Doing a rollover rather than a trustee-to-trustee transfer.
The beneficiary should NOT receive a payment made out in his or her own name.
3. Neglecting timely transfer.
Funds must be transferred before the end of the year following the year of the deceased owner’s death.
4. Failing to take RMD for the year of death.
The RMD distribution for the diseased must be taken before the amount is transferred to the inherited IRA.
5. Missing or neglecting RMD payments.
If the beneficiary forgets to take the RMD in timely fashion, the five-year rule could kick in, meaning the entire balance would need to be distributed within five years.
6. Not properly designating the beneficiary.
Beneficiary must be identifiable (not “as stated in will” or “any beneficiary of the trust”).
Beneficiary designations are all about you and the things you want to accomplish in your planning. Each situation is different, but the attorneys at Rebecca W. Geyer & Associates want you to keep in mind:
- Your estate might be your worst IRA beneficiary choice.
- Selecting the proper IRA beneficiary designations may not be a do-it-yourself affair.
- Stretch IRAs add flexibility to your estate plan!
- By Rebecca W. Geyer