The “Stretch” IRA was commonly used as an estate planning tool which allowed beneficiaries to enjoy the benefits of IRA asset growth, either tax-deferred (or, in the case of a Roth IRA, tax-free) for their lifetime. With the passage of the SECURE Act, IRAs inherited after December 31, 2019 must pass those benefits on to designated beneficiaries within 10 years, rather than over the course of their lives.
If you have never heard of the “Stretch IRA,” it is not a separate IRA. It is just a method of naming the beneficiaries of your account that would allow them the option to “stretch” the receipt of benefits over a longer time period. For example, if you named a grandchild as the beneficiary of your IRA, and they inherited that account when they were in their 30’s, they could schedule the required minimum distributions based on their own life expectancy, not on yours. This allowed for increased (tax-deferred, or tax-free) growth of the assets held in the IRA.
While the advantages of this strategy were obvious, it also had a few disadvantages. For example, naming a child or grandchild as beneficiary of a large IRA account would not prevent them from taking a lump-sum distribution. This would not only erase the potential “stretch” IRA benefits, but it may set them up for failure if they don’t have the financial maturity to handle significant wealth.
Takeaway
If the use of a “Stretch” IRA was part of your estate plan, it may be time to revisit your plan. Contact CASHMAN LAW today for a free consultation to see how we might in maximizing your beneficiaries gifts.
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