Individual Retirement Account holders and their beneficiaries dodged a bullet last month. A controversial provision regarding “stretch IRAs” that would have required that all inherited IRAs be liquidated within five years from the time of death was removed from a highway bill.
A stretch IRA is an estate planning technique for those who may not need their IRA assets to cover their retirement expenses. It allows a designated beneficiary to withdraw money from the IRA over the course of their lifetime. Holders of an inherited IRA are required to take an annual required minimum distribution (RMD). This allows the balance of the IRA to grow tax deferred and avoids immediate taxation of the account.
The controversial highway bill provision would have made an exception for spouses, children under the age of 18, or disabled beneficiaries. Stretch IRAs set up before 2013 would also have been exempted. It was never voted on.
Owners of an IRA may begin to take out withdrawals at age 59 ½, but they do not have to make withdrawals until they are 70 ½. Withdrawals made prior to 59 ½ will generally result in a 10 percent penalty.
Upon their death, a spouse designated as the beneficiary may roll over the IRA and will be considered by the IRS to be the account holder. He or she, in turn, can name a younger beneficiary (In the event the spouse does not want or need the assets, they can disclaim all or a portion of the assets within nine months of their spouse’s death. The assets then flow to contingent beneficiaries, who could then stretch the distributions over their life expectancy, which would result in a lower RMD).
The child beneficiary may then stretch the IRA out among their life expectancy. The difference is that the child must start taking out RMDs immediately and not defer them until they are 70 ½. This allows the beneficiary, if they so choose, to stretch the income from the inherited IRA out over their entire life.
Donald Liebenson writes news and features for Millionaire Corner. He has been published in the Chicago Tribune, The Chicago Sun-Times, The Los Angeles Times, Fiscal Times, Entertainment Weekly, Huffington Post, and other outlets. He has also served as a marketing writer for Chicago-based Questar Entertainment and distributor Baker & Taylor.
A graduate of the University of Southern California, he is married with a college-age son. He also writes extensively about entertainment.