How to Stretch an IRA
Things to consider when stretching an IRA:
1. There are required minimum distributions (RMDs) that beneficiaries must take, and that amount will vary depending on their age and life expectancy.
2. Traditional IRAs grow tax-deferred while Roth IRAs grow tax-free, incurring different implications on beneficiaries when they start taking distributions.
3. Some IRA custodians do not allow the stretch IRA strategy, and require that beneficiaries distribute all assets soon after the original account holder's death.
What are my options if I inherit an IRA?
If you are the beneficiary of a stretch IRA, you have several distribution options, depending on if you are a spousal or non-spousal beneficiary, and whether or not the original account owner had begun taking RMDs.
Inheriting an IRA? Your 4 options:
1. Transfer the funds to your account.
If you inherit an IRA from your spouse, the funds in the account are treated as your own, and distribution rules are the same as if the account had always been yours.
2. Transfer the funds to an Inherited IRA.
This is typically done if you inherit an IRA from someone other than a spouse. The account can continue to grow tax-deferred, and you must take Required Minimum Distributions (RMDs) annually regardless of your age.
Inherited IRA Withdrawal Rules | Beneficiary RMD Calculator
3. Take a full distribution now.
This may be considered taxable income and may push you into a higher tax bracket.
4. Disclaim all assets.
You can choose not to inherit the IRA; this is known as "disclaiming assets."
Keep in mind that your stretch IRA decisions are not always set in stone—you still have the flexibility to switch your beneficiaries, or alter your plan as IRS rules evolve or your own life circumstances change.
This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends that you consult with a qualified tax advisor, CPA, financial planner, or investment manager.