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Stretching your IRA

Stretching your IRA

Notebook and pen Black and white

A father named his son the beneficiary on his IRA, which was worth roughly $100,000. According to the Huffington Post, the son, who was 53 at the time of his father’s death, chose to receive the minimum distributions out of the Roth every year instead of taking the lump sum.

As a result, the policy continued to grow over the years. As an added bonus, the distributions were not subject to taxes because the account was a Roth IRA.

The people who set up the IRA may not be able to control how beneficiaries choose to take the money. However, an account holder can advise heirs on how to stretch those funds by following a few simple steps.

How it works

When making an estate plan, people need only to designate a beneficiary on either a Roth or regular IRA. A Roth IRA has the advantages of nontaxable distributions, which can be beneficial for those wishing to stretch the account further.

Ultimately, it is up to the recipients to make the money work for them. According to the American Association of Retired Persons, there are several things beneficiaries should do to stretch an IRA further, such avoiding moving the account to another institution or rolling the money into an existing IRA. Doing so would subject the account to tax. The AARP instead suggests that an heir does the following:

  • Retitle the IRA with the name of the deceased and the name of the beneficiary
  • Ascertain the required minimum distributions, which the IRS calculates by dividing the account balance by the years the beneficiary has left to live based on expectancy
  • Start the distributions on Dec. 31 of the year the IRA is inherited

The AARP also suggests that a beneficiary could make the money last even longer by withdrawing only the required minimum amount and then investing the remaining principle.

Considerations to keep in mind

People who are doing estate planning may want to make their wishes known if they want beneficiaries to stretch the account, as the AARP points out that most people choose to take the lump sum of the IRA. Additionally, beneficiaries would be wise to keep an eye on the policies regarding how these funds work. For example, the Supreme Court of the United States just ruled that IRAs are not protected from creditors and bankruptcy filings. Laws surrounding inheritance may be subject to change and therefore affect how beneficiaries can get the most out of an account.

Anyone who has questions regarding how the setup or inheritance process works should consult with an estate planning attorney.

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