Although the term “stretch IRA” is relatively new, the concept itself is not. The idea of a stretch Ira means to stretch the investment in your IRA out over several future generations. The strategy involved is to name a younger beneficiary on your IRA to allow it to last longer and be passed on to your family over the years..
At the age of 70, everyone with an IRA savings account is required to start taking a distribution from that account. The amount of the distribution is calculated based on a life expectancy chart. When an IRA is inherited, the beneficiary must continue to take that distribution, but the amount will be recalculated based on age. Therefore a younger beneficiary is able to take a smaller distribution amount, meaning the amount left in the IRA will last longer. Thus the concept of a stretch IRA: it is stretched across the years.
A stretch IRA is not a particular type of IRA, but a method of using beneficiaries to take an existing IRA and allow it to last over many years and many generations. While the smaller distribution is being taken the amount remaining in the IRA is allowed to continue to grow with a tax-deferred status, which further increases the ability of the stretch IRA to last longer and possibly to more beneficiaries. If a smaller amount is being taken in distributions, then the amount remaining in the account is higher and thus will grow more.
A stretch IRA is a smart choice for anyone who would like to see their IRA distributed to children and grandchildren over many years. To create the longest-lasting stretch IRA, choose the youngest possible beneficiary. This is a relatively simple procedure, but you should speak to your financial advisor before making any decisions in regards to your retirement investments.