Centara Connection

Stretch IRA Pitfalls; The IRS Gives No Second Chances

Kyle Malmstrom, Associate Advisor

A Stretch IRA is an inherited IRA that allows your beneficiary or beneficiaries to Stretch the distribution of your IRA over their lifetime versus all at once. This is a one-time opportunity that gives your beneficiary the benefit of extended long term, compounding growth which can result in astonishing wealth and family fortune.

The key to the Stretch IRA is realizing you get one crack at it, so you have to get it right. Once a mistake has been made, the opportunity is lost forever and Uncle Sam’s brutal assault on your IRA will likely result in a 40% forfeiture of that asset. So what do you need to know to protect your IRA for the next generation?

The first thing you should do is review your designated beneficiary forms and make sure that you are designating only a person(s) – as opposed to an entity such a trust or charity - as a beneficiary. Only a named person can Stretch an IRA. On the designated beneficiary form, if you leave any portion of the IRA to your trust or charity along side a named person(s), the Stretch opportunity is forever lost for the person(s) named. If you are charitably inclined, the solution is to set up a separate IRA that is for the benefit of the charity only. This would mean you have two separate IRAs; one for the children and one for the charity. Co-mingling of entities and persons on the beneficiary form will result in disqualification for Stretch provisions.

A second situation can arise when the custodian of your IRA does not allow the Stretch. If this is the case, you need to roll your IRA over to custodian that is Stretch friendly, like the ones we use (Schwab, American Equity, American Funds.) Clients of Centara need not be worried, unless of course they have IRA assets elsewhere and have not investigated the matter.

Another important aspect is communicating to your beneficiaries your intentions and the benefits of the Stretch. Should your beneficiaries not realize this opportunity exists and fail to seek the help of a qualified advisor, it could wreck the whole plan. Along those lines, family dynamics might warrant that providing more IRA assets to one child over another may be preferable. The likely scenario here is when one child is more likely to preserve and Stretch the IRA asset versus the other child who is more likely to cash it out for the Porsche.

If you have a potential estate tax burden, the liquidity to pay for that tax needs to be identified and if possible, should not be the IRA. Using IRA assets to pay for estate taxes will result in double taxation. As your beneficiary withdrawals money to pay for the estate tax, they will have to pay income tax on that withdrawal. So now they will have to withdrawal more money to pay the income tax to pay the estate tax and so forth. This scenario could cost your beneficiaries around 70-80% of that asset plus the lifetime of deferred growth on that amount.

Centara Capital Management Group, Inc.
8880 Rio San Diego Drive, 4th Floor
San Diego, CA 92108
(619) 398-1700
www.centaracapital.com
info@centaracapital.com

Securities offered through Registered Representatives of Centara Capital Securities, Inc., Member NASD/SIPC. Investment advisory and financial planning services offered through Centara Capital Management Group, Inc., a Registered Investment Advisor. Legal services provided by Centara Legal Group, APC, David Gebhardt, Principal. Insurance #0D85861. CA DRE License No. 01519824