Use an Annuity to Stretch Your IRA Payments

IRA RMD Payments Can Become Legacy Income Payments
IRA RMD Payments Can Become Legacy Income Payments. By: Ian Nolan/Cultura/Getty Images

An IRA is a Qualified Account with Required Minimum Distributions

Many in America have an IRA which can also be called a qualified account. Qualified accounts are recognized by the government as retirement vehicles and allow you to defer paying taxes on the money in the account for as late as age 70 ½. At that time, our beloved government taps you on the shoulder to remind you that it is now time to start paying taxes on that money, whether you like it or not.

This forced IRA distribution is called your Required Minimum Distribution and is commonly referred to as your RMD. There is also an IRS approved strategy that you should be aware of called “Stretching Your IRA”, or the “Stretch IRA” strategy.

You Can Continue RMDs to Your Beneficiaries

There are many people who are fortunate enough to only have to take the RMDs from their IRA as income in retirement. The plan usually being to leave a legacy, and pass the remaining IRA assets to heirs and listed beneficiaries. Stretching your IRA is simply having your beneficiaries continue to take your RMDs after you have passed away. It’s a very efficient and legal way to minimize taxes as well as leaving a lasting legacy of income to your loved ones. You do not need to own an annuity to implement a “Stretch IRA” strategy, but fixed annuities do lend themselves well because of their principal protection and contractual guarantees.

Let’s Take a Look at a Common “Stretch IRA” Example

In this case study, the father has a large dollar amount in his traditional IRA, and his wife is listed as the primary beneficiary of his IRA. The contingent (secondary) beneficiary is his only son, and the tertiary (third) beneficiary is the brand new grandson.

Here is how the “Stretch IRA” strategy works:

  • The father turns 70 ½ and starts taking his mandatory Required Minimum Distribution from his IRA, with the annual dollar amounts required being primarily based on his life expectancy.
  • After 10 years of taking his RMDs, the father passes away.
  • Because his wife is listed as the primary beneficiary, she starts receiving the RMDs from her husband’s IRA, but the new RMD amount recalculated is now based on her life expectancy.
  • The wife takes those RMDs for 10 years, and then she passes away.
  • Because their only son is listed as the contingent (secondary) beneficiary, he then starts taking his RMDs from his father’s IRA, with the annual dollar amount based on his life expectancy (not his father's or his mother's).
  • The son takes the RMDs, based on his life expectancy, from his father’s IRA, and then the son passes away after 10 years
  • Because the grandson is listed as the tertiary (third) beneficiary, he then starts taking RMDs from his grandfather’s IRA, with the annual requirement being based on his own life expectancy as well.

So that’s how a Stretch IRA works to provide income to multiple family members in successive generations. 

There Also Exists a Super Stretch IRA Strategy

If the father made his grandson the primary beneficiary; this is called a “Super Stretch” IRA because of the age discrepancy between the grandfather and the grandson.

There are numerous ways to stretch an IRA, so decide who you will list as beneficiaries to your IRA, and chose who the primary, contingent, or tertiary recipients will be with well thought out intention.

Again, remember it’s important to understand you do not need to own an annuity to implement a “Stretch IRA” strategy, but fixed annuities fit the stretch IRA strategy well because of their principal protection and contractual guarantees. There are also a few other annuity strategies developed around RMDs. At a minimum, you should be aware of the IRA Stretch strategy. If you currently work with an advisor, and this is the first time you have either heard about the strategy or understand how it really works, then it might be time to find a new advisor.