Individual retirement accounts (IRAs) have become amainstream investment vehicle since their introductionby the Employee Retirement Income Security Act in 1974.IRAs were designed to help individuals without access to aworkplace retirement savings plan, providing them with atax-avored way to accumulate money or the uture. In act,since many investors use IRAs to roll over assets rom 401(k)plans when changing employment or retiring, IRAs are nowthe dominant vehicle or retirement savings.

U.S. retirement market

Privatedenedbenet assetsDenedcontributionassetsIRAassets

$2.2 trillion$4.5 trillion$4.7 trillion

Source: ICI, April 2011.

As a result, investors may have a growing amount o assetsin IRAs. But or those who do not need to tap into their IRAunds in retirement, an IRA can also be used to pass onassets to heirs. One o the eatures o an IRA is the poten-tial to “stretch” withdrawals across multiple generations,which can help extend the lie o your savings.

What is the “stretch IRA” approach?

A stretch IRA is a strategy to extend the lie o an IRA orsuccessor beneiciaries. This concept allows the IRA tocontinue to grow tax deerred even ater the death o theaccount owner.

How it works: Maximizing the lie o your IRA

While account owners are always ree to withdraw as muchas they want (subject to tax and potential penalty) roman IRA, ederal tax law requires that owners o a TraditionalIRA take required minimum distributions (RMDs) whenthey reach age 70. The same requirement applies toSEPs, SARSEPs, and SIMPLE IRAs. Participants in qualiiedemployer-based retirement plans, such as 401(k) plans, aresubject to similar rules as well.For most IRA owners, the rules require RMDs to be based onremaining lie expectancy and paid out over a period o yearsdetermined by using the IRS Uniorm Lietime Table. AnnualRMDs are generally calculated by dividing the balance o theIRA account as o December 31 o the previous year by theIRS lie expectancy actor.I an IRA owner has designated a spouse as sole beneiciaryand the spouse is more than 10 years younger than theaccount owner, RMDs can be calculated based on the actual joint lie expectancy o the owner and spouse.Ater an IRA owner dies, ederal tax law requires benef-ciaries to withdraw a specifc minimum amount each year.To maximize the lie o the IRA and deer taxes on thoseassets or as long as possible, account owners may want towithdraw as little as possible or as long as the rules permit.

Stretch an IRA over generations

Investor Education

Create a stretch strategy

As with any savings, it is advisable to make an IRA last aslong as possible by stretching out distributions over a longtime period. There are several key elements to establishing astretch strategy:

•

Make sure you have designated primary and secondarybenefciaries or your IRAs.

•

Limit your withdrawals to RMDs to maximize the amountlet to benefciaries.

•

When the IRA owner dies, benefciaries may request to takeRMDs based on their remaining lie expectancy (see “Singlelie expectancy” chart above). Assuming the benefciary isyounger than the deceased account owner, this oten resultsin smaller amounts or the RMDs.

•

Use the longest lie expectancy actors available. I an IRAhas only one benefciary, then that benefciary is gener-ally required to calculate RMDs based on his or her ownlie expectancy. When more than one benefciary hasbeen named, generally it is required that the heir with theshortest lie expectancy be used to calculate RMDs,which results in higher RMD amounts.

•

Name someone to receive RMDs in case the benefciarydoes not outlive lie expectancy. Federal tax codepermits RMDs to be withdrawn over a benefciary’s lieexpectancy, even i the benefciary dies beore his orher lie expectancy elapses. To ensure that the entire lieexpectancy period can be used, benefciaries shouldname someone to receive RMDs. I not, the benefciary’sestate would generally become entitled to the IRA uponthe account owner’s death. At that point, the estatemay choose to withdraw the IRA in its entirety, ratherthan continue to receive RMDs over any remaining lieexpectancy period.

Single lie expectancy*

Age Life expectancyAge Life expectancyAge Life expectancyAge Life expectancy

20 63.031 52.442 41.753 31.421 62.1 32 51.443 40.754 30.522 61.1 33 50.444 39.855 29.623 60.1 34 49.445 38.856 28.724 59.135 48.546 37.957 27.925 58.2 36 47.547 37.058 27.026 57.2 37 46.548 36.059 26.127 56.238 45.649 35.160 25.228 55.339 44.650 34.229 54.340 43.651 33.330 53.341 42.752 32.3

IRS Publication 590, Individual Retirement Arrangements (IRAs).

Can a Roth IRA be stretched?

Even though RMDs are not required or Roth IRAowners, beneiciaries must begin taking distributionsupon the death o the account owner. But these distri-butions are generally not taxable or the beneiciaries.However, while Roth withdrawals are not consideredtaxable income, restricting distributions to theminimum amount based on the beneiciary’sremaining lie expectancy may allow more assets toremain within the Roth to potentially grow tax ree.

Establishing a Stretch IRA

In order to limit RMD amounts and avoid potentialIRS penalties, IRA beneiciaries need to act relativelyquickly upon inheriting an account. While a spousewho is the sole primary beneiciary o an account hasthe ability to treat an inherited account as his or herown or deer taking mandatory distributions until theyear the deceased owner would have reached age70 , non-spouse beneiciaries must generally starttaking distributions the year ater the owner’s death.Failure to do so may result in IRS penalties equal to50% o the RMD amount, or (in cases where the ownerdied prior to reaching age 70) the loss o the abilityto stretch altogether.

Benefciaries may avoid having to take higher RMDamounts by taking these actions:

a. For IRAs with multiple primary beneiciaries, eachbeneiciary should establish a separate accountand begin taking minimum distributions no laterthan December 31 o the year ollowing the yearo the IRA owner’s death. Doing so will allow eachbeneiciary to use his or her own lie expectancyor the calculation o required distributions. I sepa-rate accounts are not established by this deadline,distributions must be calculated using the oldestbeneiciary’s lie expectancy — thus resulting ingreater potential distribution amounts.

Pitalls to avoid when namingbenefciaries

A key to the stretch strategy o maximizingthe lie o your IRA is to leave assets to youngerbeneiciaries with a higher lie expectancy.Higher lie expectancies will result in loweramounts or RMDs ollowing the death o theaccount owner.

What happens i there is nobenefciary or the benefciaryis an estate?

I there is no beneiciary designated or thebeneiciary, such as an estate or trust, does nothave a lie expectancy, a rule could potentiallyapply requiring that all IRA unds be distributedwithin ive years o the death o the owner. Thisaction may lead to a signiicant tax bill since allunds have to be withdrawn and the opportunityto stretch distributions is lost.I the beneiciary is a trust, there may be anopportunity to stretch distributions. Whenestablished, the trust may clearly identiybeneiciaries by using a “look-through”provision. In this case, the trust beneiciarieswould have the ability to utilize the stretchIRA strategy. I the beneiciaries identiied arepeople, then lie expectancies can be used tocalculate distributions.b. Alternatively, beneiciaries (or non-living beneiciariessuch as trusts) can either withdraw their entire portiono the IRA or, within 9 months o the IRA owner’s death,ormally give up their right to a share o the unds. I eithero these actions is taken beore September 30 o the yearollowing the year o the IRA owner’s death, those benei-ciaries’ shorter lie expectancies will not be consideredwhen calculating the RMD amount. This strategy is alsouseul in cases where it makes sense or assets to pass tothe contingent, or secondary, beneiciary.

This inormation is not meant as tax or legal advice.You should consult with the appropriate tax or legal proessional beore making any investment decisions.