Stretch Your IRA to Protect Your Loved Ones

The concept of the stretch IRA is one that will allow you to provide money for your loved ones in the future. Here are the basics of stretching your IRA and what it can do for your beneficiaries.

The Stretch IRA

The term stretch IRA refers to a money management technique instead of an actual type of account. Therefore, you will not be able to open a stretch IRA with your financial broker. However, you will be able to open any type of IRA that you want and utilize the stretch concept with it.

Stretching your IRA basically means that you are planning to leave your retirement money in the IRA and provide it to your beneficiaries in the future. This plan goes with the assumption that you will not need the retirement money yourself. If you have other sources of income set up, you may not need to access the money in your IRA. Therefore, you can use the stretch concept and leave it to your beneficiaries and let them take advantage of the tax benefits.

How It Works

With a traditional IRA, you have to start taking required minimum distributions at the age of 70 1/2. If you do not need the money and you want to stretch the IRA, you should only take the required minimum distribution and nothing more. When you pass away, you can leave the funds in the IRA to a beneficiary. That beneficiary then has the option of leaving the money in the account and letting it continue to compound. Everyone understands how powerful compound interest is. With this concept, you can effectively take advantage of compound interest for many more years than your lifetime will allow.

Advantages

This concept will allow you to take advantage of tax deferral over a longer period of time. If you are working with a traditional IRA, no one will have to pay tax on the money until they start taking distributions. Therefore, you will be able to leave the money in the account and avoid paying taxes on it. During this time period, the money will continue to grow.

By using this strategy, you can effectively provide for your loved ones in subsequent generations. You could potentially create a multimillion dollar nest egg for your grandchildren or great-grandchildren. Even if you do not achieve superior returns on your investment, you will be able to do this with the benefit of time on your side.

Options for Beneficiaries

Beneficiaries will have a few options when they inherit your IRA. If a spouse is your beneficiary, they can choose to move the funds into their own IRA. This will allow them to do whatever they want with the funds as if they were their own. If you are leaving the IRA to a non-spouse, they can get the money through an inherited IRA. Depending on which type of IRA you have, they could take minimum distributions or decide to leave the money in the account. They could even pass the funds on to another beneficiary in the future if they choose. If they do not want to take minimum distributions they can cash out the entire account as well.

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