Stretch IRA Planning

The IRS recently allowed a taxpayer who was  a minor to undo a lump-sum distribution from an inherited IRA and avoid the 10% early distribution penalty. This ruling is one the IRS does not often reach, so taxpayers should pay special consideration to stretch IRA planning. One important characteristic of IRA planning is that when a non-spouse beneficiary rolls an inherited IRA into an IRA held solely in the beneficiary’s name, the entire rollover amount will be counted as a distribution and the beneficiary will be taxed.

If a taxpayer wishes to avoid taxes on an inherited account, he or she should maintain the account in the decedent’s name. Whether or not the there is a “designated beneficiary” will determine the timing of the minimum distributions from the account. Children, grandchildren, and even great-grandchildren can be named designated beneficiaries of an IRA.

For more information on stretch IRA planning, see Robert Bloink and William Byrnes, IRS Shows Mercy and Allows Stretch IRA, AdvisorOne, Dec. 23, 2011. 

Special thanks to Jim Hillhouse (Professional Legal Marketing, PLM Inc.) for bringing this article to my attention.