IRA Rules

Archive for the ‘Stretch Out IRA Rules’ Category

Stretch IRA rules : Example 1:

A designated spouse beneficiary of a stretch out IRA account has various payout options. One of these options, available only to a designated spouse beneficiary, is to rollover the decedent’s IRA into the spouse’s own existing or new IRA. This choice, under stretch IRA rules, permits the spouse to name his or her own primary beneficiaries who could, in turn, eventually name their own remainder beneficiary.

Stretch IRA rules : Example 2:

A Roth IRA account owner, age 75 names his child, age 55, as his designated beneficiary. If the Roth IRA account owner dies, his child has the option to take IRA distributions based on his or her own single Life Expectancy. (IRA Distributions must begin by December 31st of the year following the year of the Roth IRA owner’s death.)

In this situation, assume the designated beneficiary is 59 years old in the year the distributions are required to begin. At age 59, the single Life Expectancy factor is 26.1. The designated beneficiary should now name his or her own remainder beneficiary so that if the designated beneficiary does not survive the Life Expectancy of 26.1 years, the remainder beneficiary will be able to continue the annual minimum distributions until the IRA is exhausted in the 26th year.

Stretch Ira Rules : Example 3:

An IRA account owner passed away at age 64 and had named her spouse as the sole primary designated beneficiary. Rather than moving the inherited IRA into his existing IRA, the spouse chose to keep the assets as a Beneficiary IRA. (A Beneficiary IRA remains in the name of the deceased IRA owner, F/B/O the designated beneficiary.) The spouse decided to delay distributions until his wife would have turned age 70 �* and he also named his daughter as the remainder beneficiary. The spouse beneficiary passed away at age 65 (before his wife would have turned age 70 �). In the year following the spouse beneficiary’s death, the remainder beneficiary could continue annual minimum distributions based on the remaining Life Expectancy of the spouse beneficiary in the year of the spouse beneficiary’s death. In this case, the remainder beneficiary would start with a Life Expectancy factor of 21.0. The remainder beneficiary (the daughter) would have 21 years to deplete the IRA.

*Only a sole-designated spouse beneficiary can chose to delay mandatory distributions until the original IRA owner would have turned 70 � years old.

A stretch out IRA is a new type of individual retirement account. Specific IRA rules, the stretch IRA rules, apply to stretch out IRA accounts. Some of the stretch IRA rules are discussed here.

Stretch IRA rules on IRA distributions

Upon the death of the IRA owner, the designated beneficiary* must choose an IRA distribution option.

One option for the designated beneficiary could include taking minimum distributions over his or her Life Expectancy, rather than distributing the IRA individual retirement account in a lump sum. If a designated beneficiary, age 49, chooses to take annual minimum distributions over his or her Life Expectancy of 35.1 years, the tax-deferred status of the inherited assets remaining in the IRA could continue for 35.1 years after the IRA owner’s death.

If the designated beneficiary started taking IRA Distributions over his or her Life Expectancy, but were to pass away before the distribution term were completed, the remaining portion of the IRA would go to the designated beneficiary’s estate. The estate could continue minimum distributions over the remaining Life Expectancy of the designated beneficiary. However, most executors want to close estates, not hold them open for 10, 20 or more years. Therefore, executors tend to accelerate the IRA payments and distribute the IRA all at once.

Rather than the inherited IRA going to the designated beneficiary’s estate, the designated beneficiary could name a “remainder beneficiary” who could continue to receive the annual minimum distributions, established by the designated beneficiary, until the end of the original payout term.

Using the example from above, if the designated beneficiary were to pass away after only completing 20 years of the 35.1-year distribution term, the remainder beneficiary could continue the remaining 15 years of annual payments. Instead of distributing the IRA in a lump-sum and paying income taxes on the distribution all at once, the remainder beneficiary could spread the income tax liability from the IRA over the next 15 years.

The remainder beneficiary cannot increase the number of years over which the IRA could be paid. Instead, annual minimum distributions are only re-directed to the remainder beneficiary.

*Designated beneficiaries include living individuals and qualifying, pass-through trusts, but do not include an estate, charities, or certain non-qualifying trusts.

What is a stretch-out IRA? What are the stretch IRA rules?

A stretch-out IRA, or stretch IRA for short, is not a new type of IRA. A stretch out IRA or stretch IRA is a distribution and estate planning tool used by the owners and beneficiaries of:

• Traditional IRAs (including SEP, SAR-SEP, and Rollover IRAs),
• SIMPLE IRAs and
• Roth IRAs.

Individual retirement accounts or IRAs are growing, not just in number, but also in size. As individual retirement IRA accounts come to represent a substantial portion of an individual’s wealth, two questions arise about IRA rules and stretch IRA rules:

1. Who receives the IRA after the death of both the IRA owner and the designated beneficiary?
2. For how many years may IRA Distributions be stretched-out?

What are remainder beneficiaries in stretch out IRA or stretch IRA?

Under stretch Ira Rules, most Traditional IRA, SIMPLE IRA and Roth IRA can become Stretch-Out IRAs or Stretch IRA when the IRA beneficiaries to name individuals or entities (such as trusts or charities) to receive IRA Distributions that come due after the deaths of both the IRA owner and the designated beneficiary. Such individuals or entities are referred to as “remainder beneficiaries”.

FAQs about IRA beneficiaries under Ira Rules and Stretch Ira Rules

How many remainder beneficiaries can be named?

The Ira Rules and stretch Ira Rules allow only one remainder beneficiary can be named. It can be an individual, a charity or a trust.

Can a remainder beneficiary be changed?

Yes, just as a primary or contingent beneficiary can be changed at any time, so can a remainder beneficiary. The most recent beneficiary designation form on file with the IRA Custodian will be the one in effect.

How can a remainder beneficiary be changed?

The form to be used to change the remainder beneficiary, under the stretch Ira Rules, is called “The Designated Beneficiary Request for Distribution. Look for a Stretch-Out IRA form. This form is completed by the designated beneficiary and is included with other required documents, such as a certified Death Certificate, and Affidavit of Domicile, when the designated beneficiary takes possession of the IRA account.

• How Does A Stretch-Out IRA Work?
• Examples of Stretch-Out IRAs