The key strategy is to keep the IRA intact and growing for as long as possible after the death of the IRA owner. This process of keeping the IRA growing over the lifetime of a beneficiary is commonly known as the “stretch IRA.”
Under the distribution rules, every IRA can be a stretch IRA, all prior mistakes are forgiven (this refers to changing bene’s prior to passing or not having any specific instrument setup to facilitate a stretch ira), and changes can be made to the IRA estate plan at any time. No longer are key choices or tax elections locked-in at 70½ years old.
The stretch IRA is a simple concept. It is the ability of the named beneficiary to spread required post-death distributions over the beneficiary’s life expectancy per the IRS Single Life Expectancy Table. All that has to be done to guarantee the stretch is to name an individual beneficiary on the IRA beneficiary form. Under the current IRS rules, it’s easier than ever. Account owners can change beneficiaries anytime they like without increasing required distribution amounts.
This table will be used by every designated beneficiary to calculate post-death required distributions. The beneficiary uses the age attained in the year after the death of the account owner to look up his factor.
This is a recalculating table, but only a spouse beneficiary who is the sole beneficiary can go back to the table each year and recalculate life expectancy. A non-spouse beneficiary cannot recalculate and would only use this table to compute the first year’s required distribution for the inherited IRA. The life expectancy factor will then be reduced by one for each succeeding year (known as term-certain payout).
The named beneficiary is a daughter. Once the IRA owner dies, the daughter can stretch the inherited IRA over her life expectancy from the Single Life Expectancy Table above. If the IRA owner died in 2012 when the daughter was 39, then the daughter would use her age in 2013 (40), because that is her first required distribution year. She looks up her age (the age that she turned on her birthday in the year after the account owner’s death) on the Single Life Expectancy Table. She would look up the life expectancy for age 40 because that is her age in 2013, which is her first required distribution year. The life expectancy for a 40-year old from the IRS table is 43.6 years. This means that she is entitled to spread required distributions over 43.6 years. For each succeeding year, she subtracts one from the life expectancy. In this example, the required distribution for 2014 (her second distribution year) would be calculated using a 42.6-year life expectancy (43.6 years less one year = 42.6 years). For the third year the life expectancy would be 41.6 years, then 40.6 years, 39.6 years and so on until the original 43.6-year term has expired, unless she withdraws everything from the IRA before that time. The beneficiary can always withdraw more than the required amount.
If the beneficiary dies before the 43.6-year term has expired and there is still a balance in the IRA, then the beneficiary’s beneficiary can continue the remaining years left on the original 43.6-year schedule. It is important for every beneficiary to name a successor beneficiary as soon as they inherit so that there will be someone named to continue the schedule if the beneficiary dies early. This will avoid probate and other related estate problems. If the beneficiary names a successor beneficiary, the remaining IRA balance will go directly to that successor beneficiary with no probate, claims or other legal obstacles.