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Stretch IRA

By naming children or even grandchildren as beneficiaries of your IRA, you enable them to extend the period over which they can withdraw the inherited IRA amounts over their projected lifetimes, as determined by the IRS tables. This could result in tremendous tax savings. For example, a ten-year-old grandchild who inherited a Roth IRA from a grandparent would have 72.8 years to withdraw the money in the inherited Roth IRA tax-free. The money remaining in the Roth IRA would continue to compound during that time.

In a move that allows someone to essentially bet on the race after it is over, you can designate your spouse as the primary beneficiary of your IRA, your children as secondary beneficiaries, and your grandchildren as tertiary beneficiaries. After your death, it then is up to your spouse to decide whether to take all or a portion of the inherited IRA, or disclaim all or a portion of the IRA. Any amount disclaimed passes to the children or, if they disclaimed the money, to the grandchildren. Thus, the benefits of the tax avoidance can be stretched over the lifetimes of your descendants.


However, if you fail to maintain an up-to-date beneficiary designation and your IRA passes to your estate, your family must take out the money over the next five years, translating into a much greater tax burden. Making the best of a bad situation, if you find yourself in this position, IRS rules do not require you to take out the IRA money equally over the five years. The only requirement is that all the money must come out of the IRA within five years. Therefore, if you inherit an IRA through an estate, you at least have the opportunity to leave the money in the IRA until the end of five years, to gain compound interest during that time.

Another Nail

Smokey the Bear always said, "Only you can prevent forest fires." (As a bit of trivia, Smokey's middle name "the" was added in the 1952 song "Smokey, the Bear" for better musical rhythm.) If Smokey had inherited his wife's IRA, he might have warned everyone, "Only spouses can roll over an IRA into their own IRA." This might seem like a small detail, but it's important. Anyone else who inherits an IRA and rolls it over into his or her own IRA risks losing all the tax avoidance and deferral benefits of a stretch IRA. This is because the IRS requires the beneficiary to set up a new IRA with the inheritance that also contains the name of the deceased IRA owner in its title. For example, the title of the new inherited IRA account could read "Smokey the Bear Jr., beneficiary of IRA of Smokey the Bear."

Game, Set, Match

Listen carefully. Gordon Gekko, the character played by Michael Douglas in the 1987 movie Wall Street, was wrong when he said, "Greed is good." However, free money is good. The idea of free money might sound too good to be true, but you might have some free money available to you that you are missing. When your employer offers to match your contributions to your 401(k) plan at work, you're essentially getting free money.

According to a 2005 study done by Hewitt Associates, 22 percent of eligible employees in the United States fail to contribute enough to their 401(k) retirement plan at work to get the full company match. This should be a no-brainer. In 2006, the maximum amount that you can contribute to your 401(k) account is $15,000. However, baby boomers who are at least 50 years old are permitted to contribute an additional $5,000, for a total of $20,000 in 2006. It is important to also remember that the money you put into your company 401(k) plan is pre-tax money: You do not pay taxes on it. In addition, any money put into your 401(k) account grows untaxed; you do not pay any tax on the money until you withdraw it at retirement.

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