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Stretch IRA Basics

Stretch IRA Defined

The type of IRA that is used for the purpose of extending the tax-deferred earnings period is often referred to as a Stretch IRA. There is no specific time at which you should open a Stretch IRA account. The money from a Stretch IRA account goes directly to the heir of the owner of the account. The first enjoys the longest period of tax deferral as regards to the distributions on the IRA assets. Therefore, you should acquaint thoroughly your beneficiary about the schedule of the distributions in order to take them in accordance to the time periods required for this.

Stretch IRA Suitability

A Stretch IRA provides the advantage of alleviating the tax burden on the heirs of the holder of such an account. As long as you have enough money and income to provide for your retirement years, a Stretch IRA is the right choice you should make. Tax-deferred IRAs are the preferred type of investment by most future retirees. As they get older they intend to leave the accumulated resources to their heirs. Unfortunately, most of them forget about the eventual taxes that their beneficiaries will incur. This is overcome by the Stretch IRA. However, you should execute frequent revisions of your Stretch IRA account and inform your beneficiaries on its performance and peculiarities.

Steps to follow in establishing a Stretch IRA

The establishment of a Stretch IRA account is an easy process. Just follow these steps:

  1. Beneficiary Selection

    You should first select the beneficiary of your Stretch IRA account.

  2. Financial Advisor Consultation

    The financial advisor will give you valuable recommendations on how to set your Stretch IRA account in the most advantageous for the beneficiary way. Select an advisor that possesses the adequate experience in the Stretch IRA field.

  3. Beneficiary Accounts Set Up

    Some Stretch IRA holders may decide to include several beneficiaries. In such a case, it is recommended to establish a different account for each of them. You should specify the corresponding percentage that will go to each account. The beneficiary may decide on the distribution of the share over his/her life expectancy after s/he inherits the Stretch IRA account.

  4. Inform your beneficiaries

    Since your beneficiaries are subject to certain time limits as regards to the distributions on the Stretch IRA, you should inform them about their proportions of the assets in the IRA.

Stretch IRA Drawbacks

Unfortunately, Stretch IRAs have their shortcomings and are not suitable for every investor. Some of the disadvantages include are:

  1. Due to the volatility of the tax regulations of this field, until the time comes for your heirs to benefit from the Stretch IRA money, they may be liable to taxes.
  2. Unless you have started benefiting from the contributions, your beneficiaries may be deprived of the opportunity to benefit from the Stretch IRA.
  3. Your beneficiaries should be provided frequent information on the Stretch IRA account, therefore you need to make a revision of the Stretch IRA at least once per year.
  4. The Stretch IRA is not suitable in case you anticipate the need of money before you reach retirement years or during your retirement.
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