Stretching out an inherited IRA can produce more wealth for your heirs. Here’s how an IRA “stretchout” will work, in an ideal scenario.
1. You and your spouse will have other sources of retirement income so you’ll take minimum IRA distributions, beginning after age 70 1/2. Those distributions will be based on your life expectancy and that of a named beneficiary, probably your spouse.
2. After your death, your spouse can re-name the inherited IRA, designate new beneficiaries (such as your children) and begin a new schedule of minimum distributions.
3. When your spouse dies, your children can continue the minimum distributions over their life expectancy.
4. If the children die before reaching the end of the payout period, the distributions can continue until the end of that period has been reached, payable to beneficiaries they have designated.
However, IRA beneficiaries must be named and the IRA beneficiary forms must be found when they are needed. Simple errors in paperwork can force the IRA to be paid out right away.
To avoid such problems, you should go over your records to make sure you have a beneficiary form for every IRA you own. On each form, you should name a primary as well as a secondary or contingent beneficiary.
You usually should name individuals as IRA beneficiaries but, if your intended heir is a minor or someone who might not handle money well, a trust should be named. Then the intended heir can be a trust beneficiary. Only certain types of trusts will qualify for long-term IRA withdrawals so you should hire an experienced attorney.
What if you want to name more than one IRA beneficiary? Each beneficiary’s share should be clearly identified on the form by a fraction, a percentage, or the word “equally.”