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What is a "Stretch IRA"?
A Stretch IRA
is a term commonly used to describe an IRA that is established
to extend the period of tax-deferred earnings on an IRA following
the death of the IRA holder. Stretch IRAs allow you to provide
your beneficiaries, upon your death, with the longest allowable
period of tax-deferral before all the assets in the IRA must be distributed to them.
If you are alive after age 70 1/2, the tax laws require that certain
amounts be withdrawn from your IRAs each year. (This requirement
does not apply to a Roth IRA.) These amounts are called "required
minimum distributions." You can further the goal of the Stretch
IRA (i.e., provide your beneficiaries with the maximum possible
tax-deferred growth) by limiting your lifetime distributions to
the minimum required by the tax laws.
When can I establish a
Stretch IRA?
You can establish a Stretch IRA at any time.
How
can I establish a Stretch IRA?
You can establish a Stretch IRA with PENSCO Trust in one of two ways:
- First, you can designate in the beneficiary designation for
your PENSCO Trust IRA all of the individuals who will receive
your remaining IRA balance upon your death, and the exact percentages
each beneficiary will receive. Your beneficiary designation should
state that each beneficiary is receiving a separate share of your
IRA. Following your death, each beneficiary can choose to have
his or her share transferred to a separate IRA, and have it distributed
over his or her life expectancy, based on each beneficiary's age
following the year of your death. This will allow each beneficiary
the opportunity to take distributions over the longest permissible
period so as to maximize tax-deferred build-up. Consequently,
if you have not fully drawn down on your IRA during your lifetime,
and if your beneficiary is a young child, payments can be made
and earnings will compound on a tax-deferred basis for a very
long time.
- Second,
you can create, from your existing IRA, separate PENSCO Trust IRAs
for each of your beneficiaries, with each to be the sole beneficiary
of an IRA. This will allow for the same stretch-out benefits just discussed,
but avoids the need for the beneficiaries to divide your IRA
between themselves, and gives you greater flexibility in
determining how much each beneficiary will receive.
Under certain conditions described in the tax laws, you can have
a Stretch IRA even if a trust, rather than an individual, is your
named beneficiary. Check with your tax adviser to determine if the
trust you would like to name as your beneficiary is eligible for
the benefits of a Stretch IRA. Estates, charities and other non-individuals
are not eligible for the benefits of a Stretch IRA.
PLEASE NOTE THAT THESE RULES
DO NOT TAKE INTO ACCOUNT ANY COMMUNITY PROPERTY ISSUES YOU MAY NEED TO CONSIDER
BEFORE NAMING A NON-SPOUSE BENEFICIARY.
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