The stretch IRA is a financial strategy that has allowed people to stretch out the life, and therefore the tax advantages of an IRA after it’s inherited. Retirement account owners can name their children or grandchildren beneficiaries of their IRAs or Roth IRAs and these young heirs can stretch out the withdrawals over their own projected lifespan, enjoying decades of extra tax-deferred and/or tax-free growth.

Joe Anderson explains what a stretch IRA is in the clip below

Unfortunately the stretch might be cut short for Stretch IRAs in 2016

President Obama’s most recent budget proposal announced that they are considering putting a limit on stretch IRAs which could potentially help raise a projected $4.6 billion over 10 years, Congress’ Joint Committee on Taxation estimates. The new rule would require most retirement accounts inherited by anyone other than a spouse to be distributed (and in case of non-Roth accounts, taxed) within five years of the owner’s death.

Disabled heirs would still be able to stretch out withdrawals over their life spans and minor heirs wouldn’t have to distribute all the money until reaching 26. As for spouses, they would continue to have great flexibility with a few various options. Some of which include:

  • Rolling the account into their own name, postponing any withdrawals from a pre-tax account until they themselves turn 70 ½ or from a Roth account, until after their deaths
  • If the spouse is younger than of 59 ½ and will need to access the money, they might consider transferring the assets to an inherited IRA, allowing the spouse to access the money early without being subject to a 10% penalty

 

About the Author

Joe Anderson

President

CFP®, AIF®

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $1.5 billion in assets under management and has grown their client base to over 1,300 in just nine years of the...