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Stretch That IRA

By JLP | September 5, 2005

This is from a post I did earlier this year so most of my readers probably never saw it.

This information was taken from Ed Slott’s books, The Retirement Savings Time Bomb and How to Defuse it and Parlay Your IRA Into a Family Fortune.

In the second book, Slott talks about stretching an IRA. I gotta tell you, this is HUGE! Stretching an IRA means that a person can name a beneficiary to their IRA. When the owner of the IRA dies, the beneficiary becomes the new owner of the IRA. Mandatory distributions must begin, but they are based on the beneficiary’s age (see table below).


Age

Life
Expectancy
Factor

Age

Life
Expectancy
Factor

Age

Life
Expectancy
Factor

0

82.4

38

45.6

76

12.7

1

81.6

39

44.6

77

12.1

2

80.6

40

43.6

78

11.4

3

79.7

41

42.7

79

10.8

4

78.7

42

41.7

80

10.2

5

77.7

43

40.7

81

9.7

6

76.7

44

39.8

82

9.1

7

75.8

45

38.8

83

8.6

8

74.8

46

37.9

84

8.1

9

73.8

47

37.0

85

7.6

10

72.8

48

36.0

86

7.1

11

72.8

48

35.1

87

6.7

12

70.8

50

34.2

88

6.3

13

69.973.8

51

33.3

89

5.9

14

68.9

52

32.3

90

5.5

15

67.9

53

31.4

91

5.2

16

66.9

54

30.5

92

4.9

17

66.0

55

29.6

93

4.6

18

65.0

56

28.7

94

4.3

19

64.0

57

27.9

95

4.1

20

63

58

27.0

96

3.8

21

62.1

59

26.1

97

3.6

22

61.1

60

25.2

98

3.4

23

60.1

61

24.4

99

3.1

24

59.1

62

23.5

100

2.9

25

58.2

63

22.7

101

2.7

26

57.2

64

21.8

102

2.5

27

56.2

65

21.0

103

2.3

28

55.3

66

20.2

104

2.1

29

54.3

67

19.4

105

1.9

30

53.3

68

18.6

106

1.7

31

52.4

69

17.8

107

1.5

32

51.4

70

17.0

108

1.4

33

50.4

71

16.3

109

1.2

34

49.4

72

15.5

110

1.1

35

48.5

73

14.8

111

1.0

36

47.5

74

14.1

37

46.5

75

13.4


Here’s an example of how this works: A father has $250,000 in his Roth IRA when he dies. He has named his 35 year-old daughter as his beneficiary. For easy math, we’ll say that the father’s estate is valued below the exemption (more on this in a later post).

The 35 year-old daughter becomes the owner of the $250,000 IRA. She must take a mandatory distribution every year. The first year’s distribution would be $5,155 (to compute this, divide the account value by the life expectancy number for the appropriate age [$250,000/48.5 = $5,155]. The rest of the IRA continues to grow until the next year. Also, since this is a Roth IRA, the withdrawals are tax-free!

To compute the second year’s distribution you simply divide the IRA balance by the life expectancy minus one year (48.5 – 1 = 47.5). For year 3, 46.5. This is not rocket science.

It doesn’t take a genius to see that this can be an excellent estate planning tool.

To learn more about the stretch IRA, check out Slott’s books.

NOTE: Remember to consult your CPA or tax attorney BEFORE you do anything.

Topics: IRAs | 2 Comments »


2 Responses to “Stretch That IRA”

  1. ncnblog Says:
    September 6th, 2005 at 8:39 am

    Wow, this is a great post. I have two kids, I am 30, and my parents are in their 50’s. Can they make me the beneficiary of their IRA’s, and then I turn around and make my kid’s beneficiaries of their g-parents IRA?
    I have linked to your blog…
    check out mine and link back if ya like it..
    ncnblog.com

  2. Iva Says:
    October 20th, 2005 at 11:13 am

    Hello

    I really enjoyed browsing through your blog.
    What do you think of a converting a 401K into a rollover IRA, then to Roth.
    My husband will be soon in the job market. It is 30K and we make 85K combined gross, one child. If Suze Ormon is right that now the taxes are at their lowest
    (I really cannot see it this way) and Roth IRAs are the way to go if you can afford the taxes…

    Thanks

Comments