Helping Your Parents Leave a Lasting Legacy
Many seniors dream of helping their kids and grandkids with an ample estate but don't have a lot of money to work with. If you are helping your parents with their financial affairs, consider talking with them about the benefits of a "stretch IRA."
Stretching an IRA is a method of distributing IRA savings to one or more future generations. Simply stated, with proper beneficiary designations and estate planning, your parents can potentially leave behind a nest egg or an income stream many times greater than its original value.
Here's how an IRA can be stretched over multiple generations:
1. Your parent would name his or her spouse (or someone else) as beneficiary of their IRA and take only the required minimum distributions (RMDs) after reaching age 70 1/2.
2. When your parent passes away, instead of taking a lump sum, the beneficiary takes only RMDs based on his or her life expectancy, which is determined using tables calculated by the IRS. He or she also names a beneficiary.
3. When the IRA eventually passes to a beneficiary other than the spouse, he or she will begin taking minimum distributions based on his or her life expectancy and also should name other beneficiaries. Distributions to future beneficiaries will continue based on the life expectancy of the first non-spouse beneficiary.
To make the most of a stretch strategy, each beneficiary must take only the required minimum distributions. The IRA can continue to stretch to future generations for as long as the assets have not been fully distributed.
A financial professional can help your parents take full advantage of their IRAs by using this stretch strategy. He or she can also explain the concept to other family members so they understand how to extend the IRA on a tax-deferred basis.
Cautions
Stretching one's assets may not be appropriate in all circumstances, such as when the IRA owner needs the IRA to provide for their retirement income, or the surviving beneficiaries need the assets in a short period of time. Also, the rules applying to IRAs may change over time, so be sure to work with a qualified professional if your parents are considering taking advantage of this strategy.
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