A multi-generational IRA is an individual retirement arrangement that is advantageous not only to first-generation beneficiaries upon the account holder’s death, but also to subsequent heirs who follow the original beneficiaries after their deaths. Known by other names, such as “stretch IRA” and “eternal individual retirement account,” this estate-planning tool has the potential to multiply its value if heirs cash the funds in installments over the course of their lives.
How It Works
The benefactor has to deposit his retirement savings into an investment institution that accommodates multi-generational IRAs. The account holder also needs to name at least one beneficiary to receive the funds that are left in the account on his death. The law requires the account owner to make minimum withdrawals annually starting at age 70 ½. This income is taxed, but the balance that stays in the account continues to enjoy a tax deferral. After the account holder dies, the beneficiaries fill out the proper paperwork to maintain the inheritance in a multi-generational IRA, where it keeps accruing tax-free interest. They only pay income taxes on money they withdraw. These first beneficiaries may also stipulate that their heirs get the rights to the balance left in the account after they die. Thus, the IRA benefits multiple generations.
Multi-generational IRAs offer an advantage to account holders who do not need those funds to retire, yet must take minimum required distributions. In comparison to other IRA types, this mandatory income is lower; therefore, the tax on it is also less than individuals pay if their retirement is not saved in a multi-generational IRA. Because of the lower required distribution, a higher balance is left in the account, accruing interest until the beneficiaries inherit it. At that time, heirs have two options: to collect a lump sum within five years of the benefactor’s death, or to withdraw the annual required minimum over their life expectancy. In the latter case, the balance, which the heirs may will to others upon their own deaths, remains in a tax-deferred IRA, potentially earning interest for decades.
The Shapes It Takes
On the website CNNMoney, staff writer Shelly K. Schwartz says that in most cases, the account holder of a multi-generational IRA names the spouse as the primary beneficiary, who gets the entire fund on the account holder's death. As contingent beneficiaries, the children and grandchildren become heirs if the primary beneficiary dies before inheriting the money. With this option, the tax-deferral and interest-accruing advantage may end soon with the death of the primary beneficiary, who is also the oldest person among all. Another alternative is for the benefactor to roll the multi-generational fund into separate IRAs, one for each person he wants to benefit, when he retires. If he chooses this option, the tax deferral and mandatory annual withdrawals are based on the life expectancy of each individual heir.
An Uncertain Future
In February 2012, Mark Miller, writing online for the news agency Reuters, reported that the U.S. Senate had proposed a five-year limit for beneficiaries to keep their inherited IRAs in an interest-bearing account. When that time elapsed, they would be required to take a lump sum. The income tax heirs would owe on the mandatory large withdrawals -- an estimated $4.6 billion in 10 years -- are seen as a much-needed boost to the country’s coffers.
- CNNMoney: Personal Finance: Leaving an IRA to Heirs
- Protect Your IRA: The Information You Need to Protect Your IRA
- Estate Planner Ohio: Multi-generational IRA Retirement Option
- IRS: Retirement Plans FAQs regarding Required Minimum Distributions
- USAToday: Some Pitches for ‘Stretch’ IRAs Stretch Truth
- Reuters: ‘Stretch’ IRA Tax Shelter on the Chopping Block
- three generation family image by HP_Photo from Fotolia.com