Stretch IRAs: A Way to Avoid Taxes & Create Generational Wealth  

In our article published on September 10th, we discussed using IRAs as part of a tax planning strategy. What if you could use an IRA as a way to avoid paying taxes for the individual contributor, his or her beneficiary, and then their designated beneficiary and so on for multiple generations? Well, that’s absolutely legal and possible if you use a Stretch IRA. 

A Stretch IRA is not an actual account type. It is a financial strategy that can be used to stretch the life of an IRA that is inherited. Normally, when an IRA is inherited, the beneficiary must take all funds from the account and pay taxes in that year or the named beneficiary has 5 years to take all monies out of the account. By employing the stretch strategy, when the original account owner passes away, the named beneficiary retitles the account ultimately showing that it is an inherited IRA and the funds in the account can continue to grow and compound in a tax deferred environment ideally for decades. 

Here’s a practical example:

  • Let’s say Grand Pa Will and Grand Ma Beth are happily married.

  • They each have Traditional IRAs in their individual names with balances of $50,000 each.

  • Instead of naming each other as the beneficiaries to their accounts, they name their 25 year old children, Joey and Lina as beneficiaries.

  • Joey and Lina decide to stretch the funds in their inherited IRAs and don’t have to take distributions until they are 70 1/2.

  • This gives the assets in the account 45 years of tax sheltered earning and compounding potential.

  • Joey and Lina each have spouses and children and they too decide to name their children as beneficiaries of their inherited IRAs.

  • The original accounts of Grand Pa Will and Grand Ma Beth are now providing for the third generation.

Although a Traditional IRA was used for this example, the stretch strategy can be used for other types of IRAs as well. 

We aim to share strategies that are designed to help individuals increase their net worth, increase the value of their estate, and ultimately build generational wealth. Equip yourself with the information you need to make the best decision for you and your family; those present and to come. 

In order for this strategy to work, we have to increase the financial literacy within our families and communities. We must be aware and also make the next generation aware of the tools that can be in their toolbox. Take a few minutes to share this article with someone who will benefit from what you just learned. 

Disclosure: This article is not to be considered as tax or legal advice. Each individual has unique circumstances that need to be considered prior to executing a tax and estate planning strategy.