Multi-generational Planning

Stretch IRAs

For IRA owners

To maximize the life of an IRA, IRA owners need only withdraw no more than the Required Minimum Distribution (RMD) amounts each year while they are alive. For most IRA owners, the rules now require RMDs to be based on, and paid out over, a uniform set of life expectancies set forth in an IRS table (the "Uniform Lifetime Table"). Or, if an IRA owner has designated his or her spouse as sole beneficiary of the IRA and the spouse is more than 10 years younger than the IRA owner, RMDs can be calculated based on, and paid out over, the actual joint life expectancy of the IRA owner and the spouse. Using this calculation will yield even smaller RMD amounts than using the IRS's uniform table.

RMDs for a year are generally calculated by dividing the balance of the IRA account as of December 31 of the previous year by the life expectancy factor derived from the IRS Uniform Lifetime Table.

For IRA beneficiaries

If IRA owners withdraw no more than the required minimum amount for each year, they will never outlive their IRAs. Some amount will always be left in the IRA for the beneficiary when the IRA owner dies. The IRA beneficiary can continue to defer taxes on this amount potentially long after the IRA owner's death by beginning to withdraw his or her own RMDs as late as possible and, like the IRA owner, by withdrawing as little as possible. This article describes rules applicable to beneficiaries who are individual, living persons. Diff e rent rules apply to non-living beneficiaries, such as trusts, charities, or estates.

Postpone beginning RMDs as long as possible.

Use the longest life expectancy factors available.

If an IRA has only one beneficiary, that beneficiary is generally required to calculate RMDs based on his or her own life expectancy. Where more than one beneficiary has been named, however, all the beneficiaries are generally required to use the shortest life expectancy among them, which results in higher RMD amounts. Beneficiaries can avoid this result in two ways. First, older beneficiaries (or non-living beneficiaries, such as trusts) can either withdraw their entire portion of the IRA or, within 9 months of the IRA owner's death, disclaim their share of the IRA (meaning they can formally give up their right to the IRA). If either of these actions is taken before September 30 of the year following the year of the IRA owner's death, those beneficiaries' shorter life expectancies will be ignored for purposes of determining the beneficiary with the shortest life expectancy. Second, beneficiaries can establish separate accounts for each of their interests under the IRA. If separate accounts are established by December 31 of the year following the year of the IRA owner's death, each beneficiary can use his or her own life expectancy.

Name someone to receive RMDs in case beneficiary does not outlive life expectancy.

The federal tax code permits RMDs to be withdrawn over a beneficiary's life expectancy, even if the beneficiary dies before his or her life expectancy elapses. To ensure that the entire life expectancy period can be used — and thus the IRA can be maintained for as long as possible — beneficiaries should name someone to receive RMDs if they do not outlive their life expectancies. Otherwise, the beneficiary's estate generally will become entitled to the IRA upon the beneficiary's death, and the estate might wish to withdraw the IRA in a lump sum, rather than continue to receive RMDs over any remaining life expectancy period.

© 2007 Emerald Publications