‘Stretch IRA’ One Of The Major Advantages Of The IRA Rollover

One of the major advantages of the IRA rollover is that your beneficiaries can create a "stretch IRA."

This option is available for nonspouse designated beneficiaries. With the stretch IRA, beneficiaries can elect to make withdrawals from the IRA over their lifetimes, while maintaining the tax deferral on the account balance. The younger the beneficiary, the smaller the required distributions and the longer the time the assets have to grow tax deferred.

Without the stretch option, your beneficiaries would have to make their withdrawals over a shorter time frame, pay income taxes sooner and lose the extended tax deferral.

A nonspouse beneficiary named on the beneficiary form of the company plan can transfer the company plan balance by a trustee-to-trustee transfer (not a 60-day rollover) to a properly titled IRA and then stretch distributions from the IRA, just as if the non-spouse beneficiary inherited from an IRA.

Even if the spouse is the designated beneficiary, he/she would be required to cash in the plan's assets within five years. In addition, a designated spouse can roll over the plan's assets into his/her own IRA, and subsequently name his/her own beneficiaries, who then would have the stretch option available to them.

Ed Slott (IRAhelp.com) recommends that the best option to guarantee the stretch IRA for children or grandchildren is to roll the company plan funds over to an IRA as soon as possible after retirement.

In this way, beneficiaries will not have to deal with the company plan or the bureaucracy which may get in the way of a non-spouse transfer. Once the funds are in the IRA, all that is necessary to ensure the stretch option is make sure the beneficiary designation form is filled out correctly.

Another advantage of a rollover is that IRAs offer the option of splitting accounts and naming several primary and contingent beneficiaries. Account holders can name anyone they choose as the beneficiary.

If funds are left in a company plan, federal law places restrictions on the choice of beneficiary. For example, unless the spouse signs a waiver, the account owner may be required to name only the spouse as a beneficiary.

Investment options are usually better in an IRA, as the owner has a much wider selection of investment options. Changes to the IRA can be made more easily, and more frequently than with a typical company plan. If you are dissatisfied with one IRA financial firm, you can change to a different financial organization.

Company plans may have withdrawal restrictions, whereas with an IRA you generally have immediate access to funds, regardless of age. Owners of the IRA younger than 59 1/2 can make withdrawals, albeit with penalties. Some company plans have restrictions prior to age 59 1/2. Individuals who retain the company plan after they retire may not have immediate access to their funds.

That said, there are reasons to leave assets in company plan, such as federal creditor protection and the option of investing plan assets in life insurance.

In summary, while there are advantages to both options, most retirees will find that an IRA rollover provides more advantages than leaving the assets in a company plan.

Elliot Raphaelson welcomes your questions and comments at [email protected].