Enhance Wealth Transfer in Estate Planning Through Stretch IRAs

Individual retirement accounts are a popular tool for retirement planning, but do your clients know their IRAs can do more than just provide financial security in the here and now?

IRAs have become not just a valuable tool for retirement, but for wealth transfer in estate planning, as well.

Preserve and maximize assets with stretch IRAs

By “stretching” an IRA, your clients are able to pass on assets to future generations, providing beneficiaries with tax-deferred or tax-free growth. For individuals looking for ways to maximize their wealth transfers, this strategy could be quite appealing, as it opens the door to not just passing on assets to loved ones, but using a strategy that will allow those assets to increase in value over time.

The benefits of this strategy are numerous. Not only does it allow tax-deferred growth for heirs, if the IRA is left to a client’s spouse, the marital deduction eliminates taxation on the account at the time of the participant’s death.

When structured correctly, a stretch IRA can build up a considerable amount of value for beneficiaries – all without them contributing anything to the account.

Are stretch IRAs right for your client?

As with any financial product or service, your first step must be determining whether it is well-suited to your client. In most cases, stretch IRAs are better tailored to high-net-worth individuals who will not be relying on the entire value of their IRAs for financial support during retirement. After all, if the original owner of the IRA needs those funds, then there may not be anything to stretch at a later point in time.

Of course, there are unique disadvantages to stretching an IRA your client should be made aware of. First and foremost, the assets contained inside an IRA are subject to market risk. Additionally, how money is taken from the IRA is quite stringent.

For original owners and beneficiaries alike, there is a minimum distribution amount they may be required to take from the IRA each year. Failing to take this minimum could result in the IRS assessing a 50 percent penalty fee on the distribution amount that was supposed to be taken.

Still, for some individuals, a stretch IRA represents the ideal way to pass on wealth to friends and family while minimizing tax burden.

Potential legislative threats to Stretch IRAs

Lawmakers have been eyeing stretch IRAs in recent years and are considering imposing limits.

“Millionaires, billionaires can pass on millions in their IRAs to their heirs without paying taxes for years, if not decades,” said Senator Tom Harkin in 2013, according to Forbes. “That was never what IRAs were for. That is a loophole. It has to be closed.”

While no laws have gone into effect, it’s clear that there may come a time soon enough when stretch IRA strategies will no longer be viable options.

Regardless of whether new restrictions on stretch IRAs come to pass, the process can be complicated, and will only benefit clients if structured properly. This makes the role of financial professionals essential.

In addition to transfer and income tax planning, financial advisors must assist their clients with beneficiary designations, including both primary and contingent beneficiaries. Also, meeting key deadlines is vital during the process, as beneficiaries must be named and funds transferred into properly titled accounts by specific dates.

Finally, the rules regarding required minimum distributions can be quite complex, necessitating guidance on what original account owners and their beneficiaries must do to avoid complications.

However, with the right help, your clients stand a better chance of maintaining and efficiently expanding the value of assets for future generations with a stretch IRA.

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