Stretch IRA gives beneficiary options

People who are saving for their own retirement often wonder what will happen if their well-invested money outlives them.

Such is the case for James, who sent in this week's question.

"I am 55 years old, and other than my home and tangible assets, 75 percent of my savings is in a traditional (individual retirement account)," James wrote. "I read your article on the Internet about the stretch concept pertaining to withdrawing IRA monies.

"Whose income tax bracket is my IRA money taxed on after I die if my two sons invoke the stretch concept on withdrawals? What is the highest tax bracket my IRA monies could be taxed at? Isn't the highest tax bracket 39 percent no matter how much money is up for income tax? (There shouldn't be an inheritance tax imposed on my IRA monies.)"

All good questions, James. For help with answers, I contacted Sharla Jessop at Salt Lake-based Smedley Financial Services.

First, let's take a look at the stretch concept. Sharla says that, typically, a person's spouse is named as primary beneficiary on an IRA. With a stretch IRA, you name your children as contingent beneficiaries, or those who will receive the IRA if the primary beneficiary dies.

In the event that they inherit the IRA, she says, "This gives them the opportunity to choose for themselves whether they'll take the money out all at once or a minimum required distribution based on their life expectancy."

If they choose the latter option, it lets them keep the IRA intact and growing.

"If the account is well-managed, it could actually become a supplement to retirement for them," Sharla says.

Since children who are inheriting an IRA probably will be relatively young, say in their 40s or 50s, they have a long life expectancy and, therefore, a low distribution requirement.

"It just gives you more flexibility than having all of the money come out and be taxed at once," Sharla says. "We recommend that all of our clients consider a stretch IRA," although an attorney probably will help make the final decision, because naming beneficiaries is a legal question.

If your spouse receives your IRA as a beneficiary, James, she has the option of making it hers and continuing to defer without taking any distributions until age 70 1/2, Sharla says. "The idea is to allow the deferred money to grow tax-deferred as long as possible."