How To Fine-Tune Your Stretch IRA

Bob Carlson

Last week we reviewed the Stretch IRA, and how to maximize the after-tax value of your IRAs for years to come.

Today, we’ll take a deeper dive into the Stretch IRA, including some additional options you may wish to pursue.

The Disclaimer Plan

A disclaimer is when a person decides not to take an inheritance. There are times when disclaiming inheritance of an IRA is a good strategy.

For example, your oldest child might be in a high income tax bracket. It might be better for a family member in a lower tax bracket to inherit the IRA. Or it might make sense for your charitable contributions to be made through the IRA instead of the rest of your estate.

You should work with your estate planner to consider disclaimer strategies that might be smart for your estate and heirs and then incorporate them in a custom Beneficiary Designation Form (BDF).

For instance, your custom BDF might say that your oldest child will inherit a share of the IRA, but that share will go to a charity if the child disclaims it.

Ensuring the Stretch IRA

Your (likely) goal  is to have your heirs maximize the tax deferral of the IRA by taking out no more than the required minimum distributions (RMDs) for at least a few years.

Some IRA owners don’t want their beneficiaries to receive even the RMDs for a period of time. They might have concerns about protecting the money from creditors, the maturity of the beneficiary, or other issues.

A few IRA custodians require beneficiaries to distribute the IRAs within a few years after inheriting them. Most custodians allow beneficiaries a Stretch IRA, taking only the RMDs each year.

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But only a few custodians allow the original owner to mandate a Stretch IRA by limiting the distributions a beneficiary can take. If a beneficiary wants, the entire IRA can be cashed out right after the inheritance.

To ensure your IRA becomes a Stretch IRA and lasts for years, you need to name a trust as the beneficiary of your IRA… and state in the trust agreement how you want the distributions determined over the years.

Designating an Investment Advisor

A concern of many IRA owners is that the beneficiaries might not invest the IRA well enough. Remember, a Stretch IRA lasts for decades only if the investment returns of the IRA are adequate.

Many IRA custodians allow you to give a limited power of attorney to an investment advisor to manage the investments. But you can’t make that binding on the beneficiary. The beneficiary can revoke the power of attorney, designate a new investment advisor, or move the IRA to another custodian.

To ensure the firm or person of your choice manages the IRA, you need to name a trust as IRA beneficiary and designate the investment advisor in the trust agreement.

Beneficiary Flexibility

The tax law allows some strategies for inherited IRAs that not all custodians allow. The strategies most likely to be restricted by custodians are splitting an IRA and the portability of an IRA.

Beneficiaries who inherit an IRA together are allowed to split the IRA tax-free into separate IRAs for each of the beneficiaries. Splitting the IRA often is a good idea, because the beneficiaries don’t have to argue about investment strategies and distributions greater than the RMDs.

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Also, when an inherited IRA has more than one beneficiary, the age of the oldest beneficiary is used to determine the RMDs. (That’s not fair to younger beneficiaries.)

The tax law also allows an IRA to be transferred tax-free from one custodian to another.

However, some custodians don’t allow transfer to other custodians, or charge a fee for the transfer. Check with your custodian to see if these or other strategies are restricted or would incur fees.

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