A multi-generational IRA is an individual retirement account that allows you to leave the money to beneficiaries after your death. These IRAs also are also called stretch IRAs, legacy IRAs or eternal IRAs. They make the most sense for people who do not depend on an IRA for income in their retirement years and can try to preserve the funds for their survivors.
Multi-generational IRAs are standard IRAs with named beneficiaries; they are not a separate category of IRA. To create one, you simply name a beneficiary for the account. Required minimum distributions of funds from an IRA to the account's owner are based on his projected life expectancy, which is determined by tables developed by the Internal Revenue Service. If a beneficiary is named, his life expectancy is taken into consideration, adding years to the account's need to provide funds and reducing the required minimum distributions.
The original owner of a multi-generational IRA begins to receive distributions from the account after reaching age 70 1/2. After the owner's death, the beneficiary can receive distributions immediately, without waiting until retirement age. This means a multi-generational IRA can provide beneficiaries a steady source of income throughout their lives. Otherwise, the heirs might cash out the entire IRA at once. They still have that option with a multi-generational IRA, but they can also take smaller distributions and allow the other funds in the account to compound tax-free over the years.
You have some flexibility in the beneficiaries you name for a multi-generational IRA. For example, you can change the beneficiaries even after you have started receiving distributions. This allows you to make changes as your family situation changes. After your death, a beneficiary can decline his status as an heir so more of the distributions can go to another beneficiary. This is especially helpful when one beneficiary is set financially and another needs the income.
The multi-generational IRA approach can create problems for someone who does not have sufficient retirement funds. If you try to keep your distributions from the IRA low to help your beneficiaries, you could be hurting your own retirement planning. The beneficiaries who receive income from the IRA still have to pay taxes on the distributions. They also have to make sure they receive the required minimum distributions each year, since they could pay a steep penalty if they don't.
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.