The Home Stretch For Stretching IRA's?


The ability to stretch out IRA distributions has been a tax planning strategy for some time.  This is because while funds are still in an IRA, those funds build up tax free (meaning the tax is deferred).  It is only when a distribution is made, that the funds become taxable.  Therefore, taking out the minimum amount each year, and allowing the balance in the IRA to continue to grow tax deferred has been a pretty good deal for taxpayers. 

Stretching an IRA allows an IRA owner to designate a younger generation family member (like a child) as the IRA beneficiary.  When the IRA owner dies, that younger generation family member can elect to receive the required minimum distributions from the IRA (RMD) based on his or her longer life expectancy.  This extends (or stretches) the opportunity for tax deferral  on the investments in the IRA.

It is often said that all good things most come to an end.  Recently, Congress has been floating the idea of changing the RMD rules.  Some of the proposals that seems to be gathering momentum seem to provide that individual beneficiaries (other than the spouse) would be required to receive and pay taxes on IRA distributions within five years of the IRA owner’s death, thus eliminating the Stretch IRA.

The rationale for changing the RMD rules is no secret. The underlying reason for the RMD rules was to prevent taxpayers from deferring receipt of their already tax-advantaged retirement accounts far into the future, thus transferring wealth to future generations. Stretch-IRAs circumvent the RMD rule’s intent by allowing income tax deferral to go on for generations. And while it’s true that inter-generational transfers of retirement assets are subject to estate taxes, the $5.25 million estate tax exemption does much to take the sting out of the estate tax.

The law hasn’t changed yet and, with Congress deeply divided along partisan lines, it may not change. This tax planning opportunity is, however, on Congress' radar screen.