Stretch IRA Basics

During President Obama’s 2016 budget proposals he discussed eliminating stretch IRAs.  So what exactly is a stretch IRA?

While not an IRA in itself, a stretch IRA is rather a strategy to extend the life of an IRA for successor beneficiaries.  This allows the IRA investments to continue to grow tax deferred even after the death of the original account owner.  It enables a taxpayer to leave the IRA to younger generations and defer the taxation of the untaxed profits inside the IRA as long as possible.

In order for a stretch IRA to work, make sure you designate primary and secondary beneficiaries for your IRAs.  Limit withdrawals to the required minimum distributions (RMDs) to maximize the amount left to beneficiaries.  When the IRA owner passes, beneficiaries may take RMDs based on their remaining life expectancy.  This will often result in smaller amounts for the RMDs to the beneficiary and a longer tax deferral period. 

See Sheiresa Ngo, What is a Stretch IRA?, Retirement Cheat Sheet, Apr. 18, 2015.