Stretch v. Super-stretch

Stretch  Many high net worth individuals have substantial financial resources in addition to their pre-tax assets.  These individuals typically leave the pre-tax (tax-deferred assets) to a designated beneficiary (typically the individual’s spouse) who typically leaves the assets to another beneficiary (a second or third generation beneficiary typically children or grandchildren). 

The law permits the beneficiary to receive periodic distributions over his/her life expectancy as provided by the Internal Revenue Code.  It further permits the distribution of the balance of assets at death of the beneficiary to a second or third generation beneficiary who may also receive periodic distributions over his/her/their life expectancy.  These actions, the passing on of IRA assets from one beneficiary to the next, stretchesthe payments form the pre-tax IRA.

Super-stretch  The term “Super-stretch” refers to a scheme for distributing plan assets similar to the stretch scheme described above; however, the referenced pre-tax assets are Roth assets (either a Roth IRA or other Roth assets if they are rolled over or converted into a Roth IRA).  Since these Roth assets are currently or eventually held in a Roth IRA, they are essentially not subject to required minimum distributions.  Therefore, the individual Roth IRA owner does not have to deplete any assets from the Roth’s tax free growth environment.  This passes on a substantially greater amount of IRA assets to heirs. 

If the individual owner’s Roth IRA beneficiary is his/her spouse, he/she too can further delay the first distribution of Roth IRA assets.  After the spouse’s death, the beneficiary must begin to take distributions in the year after the spouse’s death.  This beneficiary (or multiple beneficiaries) may then receive periodic distributions over his/her life expectancy.  These actions, the passing on of IRA assets from one beneficiary to the next without depleting the IRA assets, since no there are no required minimum distributions by the original Roth IRA owner or his/her spouse, super-stretches the payments from the Roth IRA.

Author’s Note  I believe I was the first to use the term “super-stretch” in this context.  If you’ve never seen it in writing or heard it before, it’s because I made it up.  Also, be mindful that the option to stretch or super-stretch distributions may depend on the provisions of the specific IRA or applicable trust.

See: Case Study 1: Convert $2M pre-tax to Roth (children are beneficiaries) and Case Study 2: Convert $2M pre-tax to Roth (grandchildren are beneficiaries)

Copyright © 2009 Barry R. Milberg   All Rights Reserved

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