What is a Stretch Roth IRA?

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Thor OnionLover
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What is a Stretch Roth IRA?

Post by Thor OnionLover » Sat Dec 05, 2009 11:22 am

Definition or other guidance please ... What is a "stretch" Roth IRA?

I am seeing more and more references to it in last few weeks. Didn't find anything in a quick search of the Bogleheads wiki, and the word "stretch" seemingly appears nowhere in IRS Publication 590 about IRAs.

Thanks in advance.

Ron
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Post by Ron » Sat Dec 05, 2009 11:28 am

Basically (without citing IRS rules) is the ability to give your grandkids your IRA at your death (through your spouse) and have it accrue in value over many years.

You can simply do a search, as I have done:

http://moneycentral.msn.com/content/Tax ... P33760.asp

- Ron

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White Coat Investor
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Post by White Coat Investor » Sat Dec 05, 2009 11:52 am

The ideal is to die at 100 and give your Roth IRA to a 1 year old. Assuming you started this Roth at 20, and your heir only takes out the minimum required withdrawal each year, by the time your heir gets to be 100, that account will have grown for 179 years, tax free. You "stretch" the IRA between generations.

You get similar benefits by leaving a traditional IRA to your child, but it isn't nearly as dramatic because the required withdrawals are based on the beneficiaries age, and taxes have to be paid on the withdrawals at the beneficiaries tax rate.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Post by Ron » Sat Dec 05, 2009 11:55 am

EmergDoc wrote:The ideal is to die at 100.
I agree :lol: ...

- Ron

CaptMidnight
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Post by CaptMidnight » Sat Dec 05, 2009 12:30 pm

Your spouse inherits the Roth IRA and has no tax on withdrawals and no Required Minimum Distributions. Only spousal inheritors are freed from RMDs. If the spouse then dies and leaves it to the children they have no tax on withdrawals, but they do have RMDS, which are spread out over their lifetimes. The Roth is stretched first by the spouse and then by the children.
The history of thought and culture is ... a changing pattern of great liberating ideas that inevitably turn in suffocating straightjackets... | --Isaiah Berlin

JessicaTy
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Re: What is a Stretch Roth IRA?

Post by JessicaTy » Sat Dec 05, 2009 7:25 pm

Thor OnionLover,

This may help: http://www.rothirarules.net
Thor OnionLover wrote:Definition or other guidance please ... What is a "stretch" Roth IRA?

I am seeing more and more references to it in last few weeks. Didn't find anything in a quick search of the Bogleheads wiki, and the word "stretch" seemingly appears nowhere in IRS Publication 590 about IRAs.

Thanks in advance.

livesoft
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Post by livesoft » Sat Dec 05, 2009 7:43 pm

A spouse does not have to be involved.

A non-spouse beneficiary of an IRA (Roth or traditional) can (and must) begin required minimum distributions in the year after death based on the age/life expectancy tables in publication 590. This allows the beneficiary to stretch out withdrawals over their life instead of withdrawing all of it before 5 years is up.

One can always withdraw all of the IRA, but stretching gives one more tax-deferred space for a longer time.
Last edited by livesoft on Sat Dec 05, 2009 7:51 pm, edited 1 time in total.

eurowizard
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Post by eurowizard » Sat Dec 05, 2009 7:48 pm

Considering that Roth IRAs have been around for 12 years, who knows if it will stretch for 179 years.

Congress already is attempting to change HSA laws. Roth IRAs are next.

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Barry Barnitz
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Inheriting a Roth IRA

Post by Barry Barnitz » Sat Dec 05, 2009 7:50 pm

Hi:

You may find our wiki entry to be of assistance: Please see Inheriting a Roth IRA on the Bogleheads Wiki.
.

regards,
Additional administrative tasks: Financial Page affiliate blog; finiki the Canadian wiki; The Bogle Center for Financial Literacy site; Wiki Bogleheads® España.

the intruder
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Post by the intruder » Sat Dec 05, 2009 8:18 pm

EmergDoc wrote:The ideal is to die at 100 and give your Roth IRA to a 1 year old. Assuming you started this Roth at 20, and your heir only takes out the minimum required withdrawal each year, by the time your heir gets to be 100, that account will have grown for 179 years, tax free. You "stretch" the IRA between generations.

You get similar benefits by leaving a traditional IRA to your child, but it isn't nearly as dramatic because the required withdrawals are based on the beneficiaries age, and taxes have to be paid on the withdrawals at the beneficiaries tax rate.
There is more to estate planning than just deferring taxes.

It is the height of irresponsiblity to give such a large amount of money to a 1 year old grandchild or great grandchild who you dont know and dont know what they will do with the money just to save on income taxes, especially if you have children who could use the money for better purposes, e.g ,college education or their own retiremernt. It would be more responsible to give any funds available at death to the next generation.

Also your are ignoring the estate tax implications of deferring such a large amount of money over an 80 year period since the estate tax exemption upon the death of the owner may be no more than $3.5M with the excess taxed at 45% (with no cola increase) under the legislation approved by the House on Thursday which would be effective on January 1 2010, not to mention state estate taxes which may apply. GST tax would also apply if a generation is skipped.

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Post by CaptMidnight » Sun Dec 06, 2009 6:59 am

eurowizard wrote:Considering that Roth IRAs have been around for 12 years, who knows if it will stretch for 179 years.

Congress already is attempting to change HSA laws. Roth IRAs are next.
Roths aren't such a big target with only $165 billion. Compare to IRAs with $3.5 trillion.
The history of thought and culture is ... a changing pattern of great liberating ideas that inevitably turn in suffocating straightjackets... | --Isaiah Berlin

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Post by White Coat Investor » Sun Dec 06, 2009 7:49 am

the intruder wrote: It is the height of irresponsiblity to give such a large amount of money to a 1 year old grandchild or great grandchild who you dont know and dont know what they will do with the money just to save on income taxes,
The height? Really? What about blowing it on coke and prostitutes? :)
the intruder wrote:
There is more to estate planning than just deferring taxes.
You're right, of course. I'm just trying to demonstrate what is theoretically possible under current law.
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Post by Beagler » Sun Dec 06, 2009 10:32 am

“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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Post by Beagler » Sun Dec 06, 2009 10:34 am

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Last edited by Beagler on Sun Dec 06, 2009 3:26 pm, edited 1 time in total.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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Post by Beagler » Sun Dec 06, 2009 10:34 am

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Last edited by Beagler on Sun Dec 06, 2009 3:25 pm, edited 1 time in total.
“The only place where success come before work is in the dictionary.” Abraham Lincoln. This post does not provide advice for specific individual situations and should not be construed as doing so.

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Post by sscritic » Sun Dec 06, 2009 10:58 am

the intruder wrote: It is the height of irresponsiblity to give such a large amount of money to a 1 year old grandchild or great grandchild who you dont know and dont know what they will do with the money just to save on income taxes, especially if you have children who could use the money for better purposes, e.g ,college education or their own retiremernt. It would be more responsible to give any funds available at death to the next generation.
My children are fairly well off. I intend to leave money to my grandchildren. If they use it to pay for college, my children get an indirect benefit, since they will pay nothing for college. My children already have houses, my grandchildren do not. By helping my grandchildren buy houses, I am removing another possible burden from my children.

If the grandchildren squander the money, my children will still benefit because I trust that they will not pay for college in that situation either. My children also will be able to spend more on themselves during their lifetimes since they will not want to leave a single penny to their child who blew through grandpa's generous inheritance. However, my children may decide to leave money to their grandchildren, even if their own child is a wastrel.
Last edited by sscritic on Sun Dec 06, 2009 11:00 am, edited 1 time in total.

MarkNYC
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Post by MarkNYC » Sun Dec 06, 2009 10:59 am

If a 1-year old inherits an IRA (Roth or Traditional), that child cannot "stretch" the IRA to age 100. The IRA must be withdrawn over the child's remaining life expectancy. If a 1-year old has a remaining life expectancy of 74 years, the IRA must be fully withdrawn by age 75.

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Post by dkturner » Sun Dec 06, 2009 11:27 am

MarkNYC wrote:If a 1-year old inherits an IRA (Roth or Traditional), that child cannot "stretch" the IRA to age 100. The IRA must be withdrawn over the child's remaining life expectancy. If a 1-year old has a remaining life expectancy of 74 years, the IRA must be fully withdrawn by age 75.
The appropriate IRS table says it's more like 81.6 years

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Post by dkturner » Sun Dec 06, 2009 11:28 am

MarkNYC wrote:If a 1-year old inherits an IRA (Roth or Traditional), that child cannot "stretch" the IRA to age 100. The IRA must be withdrawn over the child's remaining life expectancy. If a 1-year old has a remaining life expectancy of 74 years, the IRA must be fully withdrawn by age 75.
The appropriate IRS table says it's more like 81.6 years

GG
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Post by GG » Sun Dec 06, 2009 3:28 pm

dkturner wrote:
MarkNYC wrote:If a 1-year old inherits an IRA (Roth or Traditional), that child cannot "stretch" the IRA to age 100. The IRA must be withdrawn over the child's remaining life expectancy. If a 1-year old has a remaining life expectancy of 74 years, the IRA must be fully withdrawn by age 75.
The appropriate IRS table says it's more like 81.6 years
Yes, but if it's recalculated then the divisor is not 1 until age 111.

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Post by White Coat Investor » Sun Dec 06, 2009 3:33 pm

MarkNYC wrote:If a 1-year old inherits an IRA (Roth or Traditional), that child cannot "stretch" the IRA to age 100. The IRA must be withdrawn over the child's remaining life expectancy. If a 1-year old has a remaining life expectancy of 74 years, the IRA must be fully withdrawn by age 75.
Can you cite a source on that? My understanding is you recalculate life expectancy each year you do a withdrawal. The initial withdrawal is only something like 1% a year, so the IRA is continuing to grow for decades even with the mandatory withdrawals. It's the same table as the RMDs for traditional IRAs after 70.
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Post by GG » Sun Dec 06, 2009 3:38 pm

EmergDoc wrote:
MarkNYC wrote:If a 1-year old inherits an IRA (Roth or Traditional), that child cannot "stretch" the IRA to age 100. The IRA must be withdrawn over the child's remaining life expectancy. If a 1-year old has a remaining life expectancy of 74 years, the IRA must be fully withdrawn by age 75.
Can you cite a source on that? My understanding is you recalculate life expectancy each year you do a withdrawal. The initial withdrawal is only something like 1% a year, so the IRA is continuing to grow for decades even with the mandatory withdrawals. It's the same table as the RMDs for traditional IRAs after 70.
You're right that you can choose recalculation.

However, no, after age 70 you still use table 1 as you do before 70, unlike your own IRAs

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Incorrect:

Post by Barry Barnitz » Sun Dec 06, 2009 4:35 pm

A non-spousal beneficiary of an IRA cannot recalculate life expectancies. Non-spousal IRA beneficiaries use Table 1. The Single Life Table.
The beneficiary uses the life expectancy factor for his or her age upon receiving the account and reduces this by -1 for each succeeding year, until the account is depleted. In addition, the life expectancy factor for the first inheriting IRA beneficiary is retained through any inheritance by successor beneficiaries. Please see Inheriting a Roth IRA on the Bogleheads Wiki for examples.

regards,
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Post by MarkNYC » Sun Dec 06, 2009 4:46 pm

A beneficiary cannot recalculate. See Publication 590: What Ages Do You Use With the Table(s)?

"Table 1 (Single Life Expectancy) If you are a designated beneficiary........After the first distribution year, reduce your life expectancy by one for each subsequent year." See example provided.

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Post by LadyGeek » Sun Dec 06, 2009 5:06 pm

Barry Barnitz has added a stretch IRA page to the wiki. It didn't show up in the wiki search, which is now fixed.

Please see Stretch IRA on the Bogleheads Wiki.
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Post by Bob's not my name » Sun Dec 06, 2009 6:10 pm

Go Beagler.

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Re: What is a Stretch Roth IRA?

Post by khh » Sun Dec 06, 2009 6:38 pm

JessicaTy wrote:

This may help: http://www.rothirarules.net
This caught my attention:

"Other differences include no mandatory age for distribution of earnings with a Roth IRA, whereas the normal IRA owners must begin withdrawals at 70.5 years of age. The latter also pay a 10% penalty for withdrawal of funds, including the principal, whereas there is no such penalty with a Roth IRA."


___________________________________

Do they mean a 10% penalty for withdrawal before age 59.5?

the intruder
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Post by the intruder » Sun Dec 06, 2009 7:37 pm

EmergDoc wrote:
the intruder wrote: It is the height of irresponsiblity to give such a large amount of money to a 1 year old grandchild or great grandchild who you dont know and dont know what they will do with the money just to save on income taxes,
The height? Really? What about blowing it on coke and prostitutes? :)
the intruder wrote:
There is more to estate planning than just deferring taxes.
You're right, of course. I'm just trying to demonstrate what is theoretically possible under current law.
What you have proposed may not be possible under the estate tax because of the generation skipping tax (GST) that applies if transfers of wealth are made to persons more than one generation below the generation of the donor (e.g., direct transfer to your grandchild when parent is alive.) If you live to 100 and give your accumulated roth IRA to a 1 year old while the grandchild's parent or or grand parent is alive you will have skipped 2 or more intervening generations which will result in imposition of a 45% GST on the transfer in addition to the 45% estate tax that would be imposed. The lifetime GST exemption is $3.5M same as the estate tax.

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Re: What is a Stretch Roth IRA?

Post by kaneohe » Mon Dec 07, 2009 7:56 pm

khh wrote:
JessicaTy wrote:
This may help: http://www.rothirarules.net
This caught my attention:
"Other differences include no mandatory age for distribution of earnings with a Roth IRA, whereas the normal IRA owners must begin withdrawals at 70.5 years of age. The latter also pay a 10% penalty for withdrawal of funds, including the principal, whereas there is no such penalty with a Roth IRA."

___________________________________
Do they mean a 10% penalty for withdrawal before age 59.5?
Yes, but I believe this applies just to the original owners which is not the subject of this thread. I highly doubt that beneficiaries would be forced simultaneously to take RMDs and
pay penalties, even for TIRAs.

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