The advantage of the IRA comes from the tax-deferred growth.

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.

Change of Beneficiary
The beneficiary can be changed at any time during the lifetime of the IRA owner and, in some cases, even after death (through disclaimers or death of a beneficiary). Lifetime distributions do not depend on the existence or identity of the beneficiary except in limited cases. However, every retirement account should still have a designated beneficiary and a contingent beneficiary in place at all times. Failure to have a designated beneficiary in place at death could result in the loss of the extended payout, that is, the stretch IRA.

Sales Idea
Since the IRA distribution rules allow changes in IRA beneficiaries at any time without any adverse tax consequences, that gives advisors an opportunity to make changes when necessary, keeping the estate plan flexible. Anytime you have the opportunity to communicate with the client, it’s a sales opportunity. You should take an interest in your clients so that you know when major life events occur. Life events are things like a marriage, divorce, birth, death, an adoption, new tax law changes and so on. Every one of these life events may necessitate a change in the IRA beneficiary or require more insurance or other services.

Setting Up the Stretch IRA
Setting up the stretch IRA is easy. You simply name a person as a beneficiary. That will allow the named beneficiary to spread required distributions on the inherited IRA over his remaining life expectancy.

Single Life Table (for inherited IRAs)
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.

Older Beneficiaries Can Use the Longest Life
If the IRA owner dies AFTER his required beginning date (RBD) and the designated beneficiary is older than him, the beneficiary can use the IRA OWNER’S remaining life expectancy rather than the beneficiary’s life expectancy. This will give the beneficiary a longer life expectancy than he would have had if he had to use his own life expectancy.