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How to Stretch an IRA

Future generations can profit, but many beneficiaries take the money and run

Wouldn't it be great if you could leave a financial legacy to your kids or grandkids that could actually increase over time? Well, you can, with a little bit of planning on your part — and a little educating of your beneficiaries.

See also: Leave an IRA that's heir-tight.

A "stretch" IRA extends its tax advantages like taffy across generations, provided, of course, the account is not depleted.

"If the original owner needs to use all the funds in the IRA, then that's an end to it," says Richard Reyes, a certified financial planner in Maitland, Fla. But if money does pass to a beneficiary, it doesn't have to be taken out in a lump sum, with the attendant big tax hit. It can flow from the account in small increments stretched out over the beneficiary's lifetime, says Reyes. Or even beyond.

The account can be a regular IRA or a Roth. If you are the original owner, all you have to do is name a beneficiary, such as a child or grandchild. It's the beneficiary who does the stretching by following certain guidelines.

There is no benefit to you except maybe knowing that you'll be helping someone after you're gone and helping keep money away from the tax man for a longer period of time.

"A stretch IRA is one of the biggest benefits of the tax code," says Ed Slott, a CPA and author of Parlay Your IRA into a Family Fortune. But, he adds, "it's only good if everybody knows what they're doing."

Next: Stretching an inherited IRA. >>

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