What do death and taxes have in common? They are inevitable and it usually makes sense to delay them as long as possible.
In the case of an IRA, the best opportunity to delay taxation is to take required minimum distributions (RMD) for your lifetime and then leave the account(s) to younger beneficiaries who can continue to “stretch” RMDs.
A so-called Stretch IRA is a strategy and not a separate type of IRA. Done properly, the Stretch IRA concept permits an IRA owner to designated his or her spouse as a beneficiary and for that spouse to designate younger individual(s), often a child or children as the beneficiary(ies).
IRAs are powerful investing tools because they generate tax-deferred compounding. Because taxes are not paid on growth until money is withdrawn from the account, the opportunity to minimize withdrawals over very long periods of time is an opportunity to keep tax-deferred compounding working for your family.
The opportunity to stretch RMDs is even more compelling if you skip children and leave IRAs to grandchildren. Why? Because they are younger and have longer life expectancies. Required Minimum Distributions are calculated based on the life expectancy of the beneficiary of the account. The longer the life expectancy, the smaller the RMD, the longer tax-deferred compounding works its wonders.
The rules and regulations around Stretch IRAs are contained in the tax code and are complicated with a number of exceptions for every rule. Please consult with a professional financial advisor or tax professional regarding your specific situation before attempting to make this strategy work for you.