How Does a Stretch IRA Work?

An IRA offers tax-free savings, but eventually you must start withdrawing it, and distributions are taxed.
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The individual retirement arrangement (IRA) has turned out to be one of the most popular savings plans ever devised. Millions of people of all ages make contributions to an IRA. Money deposited into traditional IRAs is tax-deductible, and withdrawals for Roth IRAs are tax-free. IRS rules regarding mandatory withdrawals at a certain age has given rise to a useful savings strategy known as the "stretch" IRA.

The Stretch Strategy

According to IRS rules and guidelines, an IRA should only benefit an individual saver, not his heirs or beneficiaries. When you get to the age of 70 1/2, withdrawals from an IRA are no longer optional. You must start taking the money out in amounts proportional to your life expectancy. To stretch an IRA means to bend the rules to extend the account's life beyond your own.


By stretching your IRA, you take advantage of the rule allowing you to name any beneficiary you choose to inherit the assets of the IRA should you die. For most people, this means a spouse or child, whom the IRS requires to make minimum withdrawals as well. Leaving the IRA to a younger person or grandchild would keep the account active longer and allow its assets to continue growing tax-free. Skipping a generation when transferring a tax-deferred savings account is how you create a "stretch IRA."

Required Minimum Distributions

You can also stretch a 401(k) plan sponsored by your employer, or an SEP plan for self-employed workers. The mandatory withdrawals still occur, beginning in the year following the year you turn 70. The amount of your required minimum distribution -- or RMD -- is the balance of the account on Dec. 31 of the previous year divided by your life expectancy. The IRS uses tables to figure your life expectancy, with different guidelines applied to married and single savers. The amount of the RMD also depends on whether or not your spouse, if you are married, is more than 10 years younger than you.

Stretching a Roth

Unlike contributions to a traditional IRA, contributions to a Roth IRA are not tax-deductible, but all qualified distributions are tax-free. Roth IRAs don't have required withdrawals at any age. Their assets must be distributed to beneficiaries within five years of the account owner's death, however, "unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary," the IRS explains in Publication 590, "Individual Retirement Arrangements (IRAs)."

If you leave the Roth account to your spouse, she can keep it intact, treating it as her own.

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