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How to Stretch Your IRA

Question: Where and how can I open up a Stretch IRA? I've never heard of this before? --Gail, RI

Answer: Gail, the “Stretch IRA” is not a type of an IRA such as a Traditional IRA or a Roth IRA that you open. Instead, the term “Stretch IRA” refers to a wealth transfer concept that can be applied to your existing Traditional IRA or Roth IRA.

With the “Stretch IRA” concept, your goal is to extend for as long as possible, the term that money inside of an existing IRA will continue to grow on a tax-deferred basis. This concept is generally of interest to individuals who don’t need to take money out of their IRAs to supplement their income and/or to those who want to leave a financial legacy to their heirs.

Implementing the “Stretch IRA” concept really boils down to proper beneficiary planning on your retirement accounts. Normally an IRA owner will name a spouse or other (usually younger) person such as a child or grandchild as the beneficiary on the account. Then, each year, the owner takes his/her legally required minimum distributions. Due to IRS regulations, the methods used to calculate these annual distributions after the death of the IRA owner, can effectively extend the payout period over multiple lives and generations. Extending the payout period and number of years money inside of the IRA continues to grows tax-deferred can literally mean tens of thousands, hundreds of thousands, or even millions of extra dollars that can be spent by future generations. Other benefits of the “Stretch IRA” concept include the potential to provide lifetime income for a chosen beneficiary or beneficiaries; and the ability to minimize your tax liability by taking out smaller distributions over time, instead of in a single, lump sum.

Bill’s Bottom Line: The “Stretch IRA” concept should be integrated into your overall estate plan. So talking with a qualified advisor and seeking the counsel of appropriate tax and legal advisors is highly suggested.

Bill Losey, CFP®, CSA, America's Retirement Strategist®, is the resident retirement planning expert on CNBC’s “On the Money”. He has been named one of America’s Top Financial Planners and is the author of Retire in a Weekend! The Baby Boomer’s Guide to Making Work Optional. Bill can be reached online at www.MyRetirementSuccess.com.