• 05
  • August
    2010

When you have an Individual Retirement Account, or IRA, it is a high priority to maintain the tax-deferred status of the account for as long as possible. Florida estate planning attorneys frequently help their clients "stretch" or extend the tax-deferred status of IRAs for as long as possible.

First the background: An IRA holder must take money out of the IRA when they turn 70 1/2. The amount that must be taken out is determined by an actuarial table provided by the IRS (Publication 590, Appendix C). The idea is that at this rate the assets from the IRA will be exhausted during the actuarially predicted lifespan of the IRA owner.

So, theoretically, if the owner lives to their actuarial life expectancy, the IRA's value will be depleted. But, in order to try to help a surviving spouse from being left destitute, the actuarial table used takes into account a...

hypothetical spouse ten years younger than the IRA owner (even if the IRA owner is not married). If there is an actual spouse who is more than ten years younger than the IRA owner, another table is used that takes this into account.

For wealthy people, this situation causes problems. Since they don't need to take distributions from the IRA to meet their cash flow needs, taking them causes excess liquidity and unnecessary income tax, and could cause the owner to be taxed in a higher tax bracket. It removes money from the tax deferral machine that is the IRA. In this way, it is a wasted opportunity to make money tax-free for others.

In order to stretch the IRA, owners can name a younger beneficiary, which will cause the IRA to be calculated using a younger person's life expectancy, and thus prolong tax deferral and compounded growth within the IRA.

The main problem with this is that the owner must actually leave the assets to a younger beneficiary, and that young beneficiary can destroy the stretch plan very easily. They can withdraw more than the required amount, and could even take everything out, and the plan to protect the inheritance is gone.