Why The Inherited Or Stretch IRA Usually Does Not Happen

Why The Inherited Or Stretch IRA Usually Does Not Happen

Unfortunately, most beneficiaries do not always take advantage of the IRA stretch out after the IRA owner’s death. In fact, often the reality is that beneficiaries will withdraw funds from the IRA much earlier and destroy what for many could be their greatest wealth building vehicle.

This occurs for a number of reasons. Sometimes, beneficiaries are not aware of the tax rules and their choices. As soon as they find out that they have been named as IRA beneficiaries, they immediately cash out the account, before they even consult with any professional advisors. 

Another mistake is sometimes, beneficiaries wrongfully believe they can rollover the inherited IRA tax-free to an IRA in their own names when, actually, this is deemed a taxable distribution of the entire inherited IRA.

When a beneficiary prematurely takes out the IRA, this results in the “blowout” rather than a  stretchout! The distributions are immediately taxed and the great opportunity for future tax-deferred wealth compounding is lost. 

Even with  Roth IRA distributions although the funds are not taxed,  the missed opportunity may be greater—the loss of tax-free wealth compounding inside the IRA!

The result of the “blowout” can be devastating causing an entire account to be depleted significantly by income taxes.

Clearly, IRA owners want to help assure that, when their accounts are inherited, the beneficiaries do not mistakenly or intentionally withdraw them too quickly and lose the tremendous potential tax-deferred compounding of family wealth. This may be even more crucial with a Roth IRA that grows tax free for the beneficiaries for their lifetime!

Many IRA owners assume their beneficiaries will have the good common sense, knowledge or proper professional advice to avoid this “blowout” and properly utilize the “stretch out”. This assumption is dangerously naïve. But even if this assumption proves correct, there are other lurking threats to the potential family wealth represented by the inherited IRA.