The Advantage of an Extended (Stretch) IRA

by Investing School on January 15, 2013

An Extended IRA is an IRA that maximizes the period of tax deferral even into the next generation. It allows a second generation beneficiary to continue distribution of assets over their own life expectancy, not just that of the original owner. This means that if the first generation beneficiary dies, their designated beneficiary becomes the second generation beneficiary – an ideal situation for someone who no longer needs, or wants, to spend all of their retirement assets.

The real advantage of an Extended, or Stretch, IRA is that it allows individuals to maximize the period during which tax deferral applies. By creating such an IRA in one’s estate, the individual can minimize the complications associated with settling an inheritance.

It is no more complicated to set up an Extended IRA than to set up a traditional one, but it stretches the tax burden over a much longer period. The main difference is that the owner specifies who is to inherit the assets remaining in the stretch IRA. Several beneficiaries can be named and percentages of the disbursed funds determined.

It is important to understand that the first beneficiary may take disbursements based upon the life expectancy of the original holder or their own. The second beneficiary can continue with the same plan established by the first beneficiary.

By using an extended IRA plan it is possible to provide funds for several subsequent generations with a minimal tax burden. Taxes associated with direct inheritance can be prohibitive and are generally considered a poor way of preparing a will.

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