Function

• IRAs are used by millions of investors to accumulate additional wealth for retirement. An owner may begin taking withdrawals not sooner than age 59 1/2 without penalties, and must begin taking distributions no later than April 1st after turning 70 1/2. Required minimum distributions are calculated from actuarial tables based on life expectancy.
  
  

Significance

• By stretching the life of the IRA, the value of the assets are transferred more slowly to designated heirs who are named as beneficiaries on the account. Smaller distributions may mean a lower tax liability.
  
  

Considerations

• Since the goal is to stretch the payout over multiple lifetimes or generations, care must be taken in the proper naming of beneficiaries. At the death of the IRA owner, the beneficiary (or beneficiaries) receives the proceeds of the account.
  
  

Prevention/Solution

• It is possible to name grandchildren as contingent beneficiaries, second to a spouse or child, and have balances of the account not yet distributed paid out over longer life expectancies. Even if an heir is not yet 59 1/2, the distributions are exempt from penalties normally associated with early withdrawals even though ordinary income taxes will still be due.
  
  

Warnings

• Not all custodians who administer IRAs handle this type of strategy. Seek guidance from a qualified investment adviser familiar with estate planning.