Here's a way to plan your estate so that your heirs pay less tax and get less of your retirement income if you don't think you'll need all of the money in your Individual Retirement Account when you retire. It's called a "stretch IRA" or "Multi-generational IRA," and it's a complicated investment tool that lets you keep your IRA tax-free for a long time after you die.
By naming your children and grandchildren as the beneficiaries of your retirement assets, you let them spread out the annual distributions from that IRA over the course of their lives.
Putting together the stretch
There are four main ways to set up a stretch IRA: the traditional, the spousal rollover, the participant-direct, and the mixed, or combination, approach.
In a traditional plan, your spouse is the main beneficiary and your children or grandchildren are the contingent beneficiaries. However, distributions and income tax deferral only last as long as the oldest beneficiary lives. If you use the Spousal Rollover Approach instead, your spouse stays the main heir, and your children or grandchildren get their own IRAs as beneficiaries. With this strategy, the distributions and tax breaks can last as long as the people you name as beneficiaries live. That, in turn, gives a lot more time to save on taxes and gives that IRA investment more time to grow.
If neither you nor your spouse will need to use the IRA during your lifetime, you could also structure your multi-generational IRA using the Participant Direct method, which can give you the best tax benefit of all.
With this strategy, you'll be asked to split your retirement assets into several different IRAs, like the spousal rollover, but your children and grandchildren, not your spouse, will be listed as the primary beneficiaries. This way, you can lower the minimum distributions you have to take out once you turn 70 and a half, leaving more money for your heirs.
The last option is the Mixed approach. Combining some of the strategies from the stretch IRA, it is set up as a spousal rollover and the rest as a participant direct. You might want to look into this strategy more if the surviving spouse doesn't need the IRA money but is still in charge. Talk to a qualified financial planner who has experience with Stretch IRAs to learn more about these plans and figure out which one is best for you and your family.
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