Stretching an IRA

As I mentioned earlier, I am currently reading Ed Slott's books, The Retirement Savings Time Bomb and How to Defuse it and Parlay Your IRA into a Family Fortune.

In the second book, Slott talks about stretching an IRA. I gotta tell you, this is HUGE! Stretching an IRA means that a person can name a beneficiary to their IRA. When the owner of the IRA dies, the beneficiary becomes the new owner of the IRA. Mandatory distributions must begin, but they are based on the beneficiary's age (see table below).

       Life           Life            Life
    Expectancy     Expectancy      Expectancy
Age   Factor   Age   Factor   Age    Factor
 0     82.4    38     45.6     76     12.7
 1     81.6    39     44.6     77     12.1
 2     80.6    40     43.6     78     11.4
 3     79.7    41     42.7     79     10.8
 4     78.7    42     41.7     80     10.2
 5     77.7    43     40.7     81      9.7
 6     76.7    44     39.8     82      9.1
 7     75.8    45     38.8     83      8.6
 8     74.8    46     37.9     84      8.1
 9     73.8    47      37      85      7.6
10     72.8    48      36      86      7.1
11     71.8    49     35.1     87      6.7
12     70.8    50     34.2     88      6.3
13     69.9    51     33.3     89      5.9
14     68.9    52     32.3     90      5.5
15     67.9    53     31.4     91      5.2
16     66.9    54     30.5     92      4.9
17      66     55     29.6     93      4.6
18      65     56     28.7     94      4.3
19      64     57     27.9     95      4.1
20      63     58      27      96      3.8
21     62.1    59     26.1     97      3.6
22     61.1    60     25.2     98      3.4
23     60.1    61     24.4     99      3.1
24     59.1    62     23.5    100      2.9
25     58.2    63     22.7    101      2.7
26     57.2    64     21.8    102      2.5
27     56.2    65      21     103      2.3
28     55.3    66     20.2    104      2.1
29     54.3    67     19.4    105      1.9
30     53.3    68     18.6    106      1.7
31     52.4    69     17.8    107      1.5
32     51.4    70      17     108      1.4
33     50.4    71     16.3    109      1.2
34     49.4    72     15.5    110      1.1
35     48.5    73     14.8    111+     1
36     47.5    74     14.1
37     46.5    75     13.4

Here's an example of how this works: A father has $250,000 in his Roth IRA when he dies. He has named his 35 year-old daughter as his beneficiary. For easy math, we'll say that the father's estate is valued below the exemption (more on this in a later post).

The 35 year-old daughter becomes the owner of the $250,000 IRA. She must take a mandatory distribution every year. The first year's distribution would be $5,155 (to compute this, divide the account value by the life expectancy number for the appropriate age [$250,000/48.5 = $5,155]. The rest of the IRA continues to grow until the next year. Also, since this is a Roth IRA, the withdrawals are tax-free!

To compute the second year's distribution you simply divide the IRA balance by the life expectancy minus one year (48.5 - 1 = 47.5). For year 3, 46.5. This is not rocket science.

It doesn't take a genius to see that this can be an excellent estate planning tool.

To learn more about the stretch IRA, check out Slott's books.

NOTE: Remember to consult your CPA or tax attorney BEFORE you do anything.