The Stretch IRA: An Asset Transfer Strategy
Provided by: Michael Alioto, Senior Vice President, UBS Financial Services Inc.
everyone. Neither UBS Financial Services Inc. nor its employees provide tax
lthough you initially established an IRA as a nest egg for your retire-
or legal advice. You should consult with your legal and/or tax advisors when
ment years, you may also want to consider using your IRA as a tax-
making decisions about retirement plans and retirement plan distributions.
efficient vehicle to pass wealth on to your heirs—particularly if you
The information contained in this article is based on sources believed to be
have other sources of retirement income and do not need to draw finds from
reliable, but its accuracy cannot be guaranteed.
your traditional IRA. You may choose to keep your traditional IRA intact
until reaching age 701/2 , at which time you must
begin taking required minimum distributions
(RMDs).
AN EXAMPLE OF THE STRETCH IRA STRATEGY AT WORK
The discussion that follows will focus on a
strategy to withdraw the minimum amount
required each year under IRS guidelines and to
RMD Income to Each
maximize the tax-deferred compounding on the
Family Member
assets remaining in the IRA for as long as pos-
sible. The strategy is commonly referred to as the
FIRST GENERATION
"stretch IRA."
In the example, the IRA owner, John Smith, has
John's RMD amount over
John's IRA is $300,000 &
JOHN
named his wife, Mary as the sole primary benefi-
2 years (Age 70-71) is
John names his wife, Mary,
(original IRA owner)
ciary of his IRA. John just turned 70 1/2 and has
$22,649"
as his sole primary
now taken his first RMD. John dies at age 71.
beneficiary
Mary, who is now 66, decides to treat the IRA
as her own and names her son, Jack, as her pri-
Mary's RMD amount over
Mary's RMD Income over
John dies at age 71.
MARY
mary beneficiary. Since Mary has elected to treat
8 years (Age 70-77) is
4 years (Age 66-69 - No
Mary, now age 66, elects to
(first beneficiary; spouse)
$156,123.*
RMDs required) is $0.
John's IRA as her own, she does not have to take
treat John's IRA as her own
& names her son, Jack, as
RMDs from the IRA until she turns age 70 1/2.
her beneficiary.
(Note that this option is only available to a spouse
who is named sole primary beneficiary.) Mary
SECOND GENERATION
takes RMDs from age 701/2 until she dies at age
77.
Jack, now age 53, maintains the account as a
Jack's RMD amount over 23
Jack can take distributions
Mary dies at age 77
JACK
years (Age 53-75)
over the longer of Mary's
Jack, now age 53,
beneficiary IRA and names his son, Mark, as
$933,576*
life
expectancy
or
his
own
maintains
the
account
as
a
beneficiary. Jack is required to take distributions
life expectancy.
beneficiary IRA and names
from the IRA based on his remaining single life
his son, Mark, as beneficiary
expectancy. He takes distributions every year for
another 23 years until his death at age 75. His
THIRD GENERATION
son Mark, at age 41, now takes distributions
each year until the assets in the account are fully
Mark's RMD amount over 9
Mark can take distributions
Jack dies at age 75
MARK
depleted.
years (Age 41 — 49)
using Jack's remaining life
Mark, now age 41, takes
Spanning over three generations, the IRA,
$1,026,841*
expectancy factor, which
distributions every year
which had a beginning balance of $300,000,
results in 9 years worth of
until assets in the IRA are
provided over $2.1 million in income over a 46-
distributions until assets are
depleted
depleted.
year period of time. (See the chart for details and
assumptions.)
Your beneficiary designations will have a signif-
icant impact on the available payout options from
your IRA after your death. It is always a good
idea to name both primary and contingent benefi-
ciaries — even if you expect your beneficiary(ies) to
be living. It's just another way to help assure that
you are the one controlling to whom your IRA
assets are ultimately distributed. This will also
pave the way for your beneficiaries to potentially
take advantage of the stretch IRA strategy.
The stretch IRA might not be appropriate for
$2,139,189 Total
Distributions for All
Generations* *
* Asset growth is based on a 7% rate of return and assumes all generations receive their respective Required Minimum Distributions
as defined by the IRS on December 31st of each year distributions are required.
**This number assumes that each generation elected to take only the required minimum over the longest period allowed by current
law Should any recipient elect to take distributions greater than the minimum or receive a lump sum at any point this total would
significantly change.
This illustration is hypothetical and not meant to represent the performance of any specific investment or security. Actual returns
will vary and principal value will fluctuate. Individual results will vary. Distributions are subject income taxes. This illustration is
based on current tax and regulations law (as of August 2006), which may change in the future.
*UBS
Wealth
Management
ADVERTISEMENT