Managing Your Money

The end of the "stretch" IRA??

If you inherit an IRA today, you can stretch the withdrawals from that IRA across your life expectancy. Doing so often results in a very large account balance because the assets continue to grow tax deferred and the beneficiary only needs to take out a small amount each year. This effect is most pronounced when a child or very young adult is the beneficiary of the IRA and the assets can grow tax deferred for many decades. In fact, a popular strategy is to have grandparents name their grandchildren as IRA beneficiaries.

However, Congress is hungry to recognize additional tax revenue and a proposal has been submitted that would significantly decrease the amount of time a beneficiary has to clear out the IRA. Under the new proposal, withdrawals would have to be made within five years (instead of over the beneficiary's life expectancy). This change would apply to accounts whose owners died after 2012.

It doesn't seem likely that this change will happen very soon, but you should be aware that it is a possibility -- especially if you are considering doing a Roth conversion and leaving the Roth to a much younger beneficiary.

Even if the changes go through shortly, there would likely be exceptions made for certain types of beneficiaries -- for example, children with special needs.

Also, there have always been additional provisions for spouses and those provisions are expected to continue. Spouses who inherit IRAs can elect to roll the deceased spouse's IRA into their own IRA or the surviving spouse can elect to take withdrawals over their own life expectancy. The latter option is often selected when the surviving spouse is younger than age 59 and a half and wants the ability to take withdrawals from the IRA without owing a penalty.

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