Stretch IRA - administrative guidance?

[Guest amfam2]

Is anyone aware of any resource materials or guidance on the administration of Stretch IRAs?

My organization is looking at adding it as part of our overall retirement planning product line.

I am finding very little in terms of guidance on administering these types of IRAs in terms of annual tax reporting, etc.

Are you aware of any resource which specifically addresses the nuts & bolts of administering these types of arrangements?

[Appleby]

My POV…

Technically, all your organization needs to do is allow your IRA document to include a provision for a first generation beneficiary to ‘name a beneficiary’ (second generation beneficiary) for the inherited IRA and the second to name a third and so on.

As you know, the stretch IRA concept is simply allowing the IRA to continue after the death of the first generation beneficiary. Before the stretch IRA concept, many IRA documents required the fist generation beneficiary to designate his/her estate as the beneficiary of the inherited IRA. Upon the death of the first generation beneficiary, the estate was required to distribute the balance of the IRA (by the end of the year following the year the first generation beneficiary died). Implementing the stretch provision allows the second-generation beneficiary, and any subsequent generations of beneficiaries, to continue distributions over the life expectancy of the first generation beneficiary, regardless of when the first generation beneficiary dies.

As long as you (and your staff) understands the concept, and you incorporate the language in your IRA plan document, then you can produce some customer friendly brochures to push the “New Stretch IRA”- careful, I hear the “Stretch IRA” name is copyrighted. Maybe you could call yours “The Elastic IRA” or “The Rubber-band IRA”

As far as reporting, nothing much would change. The FMV reporting requirement would still apply, and distributions must be reported in the name and TIN of the beneficiary to whom paid ( i.e. first generation beneficiary, should he/she die, second generation and so on.).

Administratively, if you handle the calculation for the accounts, just bear in mind that all calculations must be based on the first generation beneficiary.

I hope this helps.

Let's see if anyone else will post some good ideas.

[BPickerCPA]

Appleby,

There is no LEGAL requirement that an IRA must be paid out after the death of the initial beneficiary, even if that IRA now belongs to that beneficiary's estate.

It's true that there are custodians that require this, but to have a stretch IRA, all you need is a custodian that permits the IRA to be paid out over the maximum time allowed by law.

[Appleby]

Agreed Barry…by “Upon the death of the first generation beneficiary, the estate was required to distribute the balance of the IRA (by the end of the year following the year the first generation beneficiary died).” I meant that as directly related to the preceding sentence “Before the stretch IRA concept, many IRA documents required the fist generation beneficiary to designate his/her estate as the beneficiary of the inherited IRA…”

I also agree that to have the stretch IRA, from a practical perspective all you need is “a custodian that permits the IRA to be paid out over the maximum time allowed by law.” …but, remember, before the famous PLR was issued, everyone (well most conservative custodians/trustees) though that a beneficiary could not be designated for an inherited IRA. Then the PLR was issued, proving that these conservatives were wrong, and that people like you were right all along. Since then, many financial institutions push the stretch concept as a product (similar to what occurs with the Individual (k) Plan), the product being an inherited IRA being passed on to a succession of beneficiaries, "for the duration of the time allowed by law". For you and I, the document allowing the stretch is sufficient- because we know what this means. However, from a regular customer’s perspective, influenced by what is written in the media and brochures by some financial institutions, they want you to tell them you are offering a stretch (or other appropriate name) IRA product. For most, explaining that it is allowed is not enough. Like anything else in marketing, it’s all about the packaging, the brand, the manner in which it is presented…it is the reason why we pay more for some brands, when the content may be the same as the less popular brand…

amfam2 wants to add it ( the stretch) as part of their product line- to effectively sell it as a product- it must be packaged as a product- not just an IRA, but a Stretch IRA ( or other appropiate/allowable name).

[BPickerCPA]

And, Appleby, you and I have to just sit back and sigh when a client comes in and tells us that he wants us to "convert" his IRA into "one of those 'stretch' IRAs".

[Appleby]

Well what do you know Barry- had two clients today who wanted the " stretch IRA."

Yes. I sat back, sighed- just a little…then I leaned forward, smiled and said ” I can help you with that!!!! “ .Their current financial institution did not offer this product (they said), so they wanted to transfer their IRA assets to us... Yup. They left happy.

[Guest amfam2]

Thanks to all of you for your insights. Now lets have some real fun!!:

I am left w/great questions being asked of me and as I see it, the Stretch IRA concept has a lot of details which no one seems to have addressed:

1. Let's assume a beneficiary elects to stretch out an inherited IRA w/distributions over their lifetime (i.e. a Stretch IRA). What if individual decides to move IRA assets to another financial institution - does tax law grant them the right to do an IRA transfer? (Keep in mind that there is a technical difference in the tax law between rollover & transfer).

2. What if funds are coming from a qualified plan (perhaps profit sharing or 401(k)) - it is my conclusion that the non-spouse beneficiary does not have the right to elect a rollover to an IRA, and then decide to annuitize the distributions.

3. Once the individual establishes the payment stream for a Stretch IRA, I believe they have the right to alter the amount of their payments (for example, take an additional withdrawal in any year in the event they need extra spending money) as well as the right to take a full distribution of the entire account balance in any year. However, in a different section of the tax code (IRC 72(t)), allows an individual to elect to set up their distributions over their lifetime and prior to age 59 1/2 in order to escape the 10% premature distribution penalty. If this individual alters their payment stream w/in a 5 year period, the 10% penalty tax is retroactive. Is anyone aware of any penalty taxes which may or may not be applicable in the event a Stretch IRA holder decides to alter the payment schedule?

[Guest amfam2]

Please skip Q 1 - I posted the same question on Benefitlink's Q & A - Ask the Experts - Estate Planning for IRAs and received a 24 turnaround in response (!) (thanks Kristen!).

I am interested in anyone's insights into Q 2 & 3.......

[ElGuapo]

3.  Once the individual establishes the payment stream for a Stretch IRA, I believe they have the right to alter the amount of their payments (for example, take an additional withdrawal in any year in the event they need extra spending money) as well as the right to take a full distribution of the entire account balance in any year.  However, in a different section of the tax code (IRC 72(t)), allows an individual to elect to set up their distributions over their lifetime and prior to age 59 1/2 in order to escape the 10% premature distribution penalty.  If this individual alters their payment stream w/in a 5 year period, the 10% penalty tax is retroactive.  Is anyone aware of any penalty taxes which may or may not be applicable in the event a Stretch IRA holder decides to alter the payment schedule?

IRC 72(t) lists the exceptions to the 10% penalty, of which death is one, so the bene is not relying on the substantially equal rules to avoid the penalty. In other words, minimums are just that--minimums. A beneficiary may always take more or take it all and not worry about the penalty.

[Appleby]

Question 1- the IRS has allowed beneficiaries to transfer inherited IRAs. Most custodians allow it. Frankly, it would not be good business sense to refuse to accept inherited IRAs as transfers- much moolah. Some custodians may refuse to allow the account to transfer out-, which is unlikely, if the stretch provision is allowed.

Question 2- You are right. A non-spouse beneficiary may not rollover inherited assets from a qualified plan Reg § 1.402©-2, Q&A 12. The provisions in the qualified plan document usually determines the distribution options available to the beneficiary of a qualified plan.

Question 3- I agree with ty07480 . The 10% penalty to which you refer would not apply to distributions from an inherited IRA, as they already meet the exception by being “death distributions”

[Lynn Campbell]

Appleby, re question 2: assuming a one-person or very small plan, with the owner/participant having a substantial balance and eligible to take a distribution from the plan, is this a good reason to roll the funds to the IRA prior to death, so that payments may be made to the non-spouse beneficiary over their lifetime (compared to the qualified plan, which might not be able to stay "in existence" for that many years just for the purpose of making the death benefits payable over many years). I am assuming there is no spousal beneficiary or that the spousal beneficiary is deceased and the actual beneficiary is a 30 year old child. Thanks for all input.

[Appleby]

Hi Lynn,

In my opinion, that would be a very good reason to roll the assets to the IRA before death. On the other hand , if the participant dies before being eligible to receive a distribution from the plan, and rolling the assets to the IRA before death is not an option, there may still be an attractive option for the beneficiary. In PLR 200244023, the IRS allowed the non-spouse beneficiary of an orphan plan to use the inherited plan assets to purchase a nontransferable variable annuity contract. This in effect, provided similar benefits because the use of the plan assets to purchase the annuity purchase was a non-taxable transaction and the beneficiary was allowed to distribute the assets over his life expectancy.

I have a copy of the PLR, but it is too large to be attached to the post