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IRA Beneficiary Rules: The “Stretch” IRA

Note: This article focuses on choosing beneficiaries for your IRA. If you are the beneficiary of an inherited IRA, please see my article on inherited IRA rules.

When choosing beneficiaries for your IRA, there are really only two things you need to know:

  1. Your will is not the proper place to name an IRA beneficiary, and
  2. To the extent that it’s practical to do so, it can be advantageous to name your younger loved ones as the beneficiaries to your IRA.

Where to Name an IRA Beneficiary

When you open an IRA, the IRA custodian will ask you to fill out a beneficiary form. When you die, the person(s) listed on that form will inherit your IRA — even if somebody else is designated in your will as the recipient of your IRA.

So, when something changes in your life — new children, new grandchildren, divorce, etc. — it’s important to update your IRA beneficiaries accordingly. One of your children being left out (or an ex-spouse inheriting your IRA!) simply because you forgot to update a piece of paperwork would be a real shame.

Fortunately, updating your IRA beneficiaries is easy. With most brokerage firms, you can do it online. If you can’t, you should be able to get it done with a quick phone call.

Beneficiary Distributions: “Stretching” an IRA

When a non-spouse beneficiary inherits an IRA, she’s required to take distributions from the account over her remaining life expectancy. (More on that here.) The younger the beneficiary, the greater her remaining life expectancy and, therefore, the greater the ability for savings via tax deferral.

For example, if a 25-year-old inherits an IRA (from somebody other than his spouse), he’ll have to start taking distributions the following year (at age 26). At 26, according to the IRS life expectancy tables, his remaining life expectancy is 57.2 years. As such, he’ll be required to distribute the IRA over the next 57.2 years.

In contrast, if a 78-year-old inherits an IRA (from somebody other than his spouse), he’ll have to distribute the account over the next 10.8 years — a much shorter period due to his shorter remaining life expectancy.

In short, the longer a beneficiary’s remaining life expectancy, the smaller percentage of the IRA he has to withdraw each year, and the more he can take advantage of the power of tax deferral. As a result, to the extent practical, it often makes sense to choose your younger loved ones as the beneficiaries for your IRA.

Easy, Right?

As complicated as IRAs can be, choosing the beneficiary (or beneficiaries) for your IRA is fairly straightforward. Just remember to keep your beneficiary form up to date with your IRA custodian. And, if it’s reasonable to do so, consider leaving your IRA to your younger loved ones in order to maximize its value for your family.

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  1. Great info! Beneficiary designations on IRAs are one of the easiest yet most important financial planning tasks to take care of.

  2. Susan Tiner says

    Good point. A probably obvious comment is that the stretching benefit only makes sense with a traditional IRA, since with a Roth IRA the required distributions are tax free as long as the IRA has been established for five years. In the Roth case there’s a benefit in leaving it to a spouse vs non-spouse since the spouse can avoid RMDs.

  3. cpa accounting leads says

    So few people understand the IRA beneficiary rules. Most people just take the lump sum benefits and pay the tax. It’s good to see the rules spelled out in an article that people can understand.

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