Everyone Can Relax and "Stretch-out" - InvestorGuide University

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IRA
Everyone Can Relax and "Stretch-out"
by Tim Koenning (Write for us!)
(Click on the links within the article to get definition of that word)

Over the last several years, we have read and heard much about the "stretchout" IRA. Many IRA holders have painstakingly learned about the extreme complexities of Required Minimum Distributions (RMDs) and the ability to provide a stream of income to their beneficiaries at their death. Planners carefully outlined the land mines to avoid and prompted IRA holders to ask their financial firm if they offer "stretchout" IRAs. Well, we can all relax now, the IRS issued proposed regulations that have all but eliminated the fear of making bad decisions and essentially allow a "stretchout" IRA for everyone.

RMD rules state that once a participant reaches the age of 70 1/2, funds must be withdrawn each year from their IRA. RMD calculations are based on the participant's birthdate and the previous year's ending value of the IRA account. Based on these ingredients the required minimum distribution (RMD) is determined by simply dividing the previous year's ending value of the IRA by the factor from the appropriate IRS life expectancy table.

Upon the death of an IRA participant who has begun RMDs, the beneficiary is required to continue (or accelerate) withdrawals from the IRA. The "stretchout" IRA concept simply addresses the availability of beneficiaries (often younger beneficiaries) to continue the "life" of the IRA. This allows the beneficiaries to receive the benefits, such as continued tax deferral, of the IRA over the remaining "life" of the IRA. In the past, it took careful planning to make an IRA a "stretchout" IRA. However, in 2001, new regulations from the IRS have made stretching out an IRA easier than ever before.

Under the new rules, as long as all of the IRA beneficiaries are living people, then the "stretchout" IRA will be the default election. Each beneficiary may take RMD's according to his or her own life expectancy provided the IRA is divided into separate beneficiary IRA's by December 31st of the year following the year of the participant's death. If the IRA is not split into separate IRA's, then the RMD's will be taken according to the eldest beneficiary's life expectancy. If a trust is the IRA beneficiary, then a "stretchout" may be accomplished, provided the trust is deemed to be a "designated beneficiary." Basically, in order for a trust to be deemed a "designated beneficiary" all of the beneficiaries must be people, although there are some administrative requirements as well. However, even if a trust is deemed a "designated beneficiary," the RMD's will be calculated according to the life expectancy of the eldest trust beneficiary.

While these issues are a very important part in future planning of an IRA, remember each case is different and only part of an overall financial strategy. With this in mind, solutions for these issues are best addressed with the assistance of a financial advisor and/or tax professional. I'll be happy to discuss this or any financial issue with you personally.