The IRA Stretch—How Far Will Your Retirement Dollars Go?

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Sometimes, when my cousin Mike and I are hanging out around his pool, just relaxing, we like to talk about investing strategies.

Usually, we end up debating about our IRA’s (Individual Retirement Accounts). Both of us are pretty successful guys, with Mike and his wife being what I consider high-income earners. Mike’s beef is that working his IRA account (self-directed that is) on a regular basis is a lot of work.

I really can’t argue with him there, as it can take quite a bit of effort to find enough deals to deploy capital into, which are fairly safe and also provide a nice yield.

Related:Why You Need to Start Your IRA Now…and Any Other Tax-Free or Tax-Deferred Vehicle You Can

But, that’s just one part of the problem. I pointed out, remembering from my financial planning days, a crazy statistic on how most retirement money never actually gets spent by the retiree(s). Instead, the bulk is eaten up by taxes, with whatever’s left going to their heirs.

So, Mike’s point is what the hell are we doing all of this self-directed IRA work for anyway, if we’re never going to get to spend it?

In fact, if we really need our IRA money to live on, we’ve got bigger problems. In other words, we should just have another cocktail, or maybe a cigar, and just continue hanging out around the pool.

But, then I pointed out to him how much he likes his daughter and that he could lower her tax burden and maybe set her up down the road. I asked him if he ever considered the IRA Stretch.

What is the IRA Stretch?

Although much content is available online about this strategy, the Investopedia definition of Stretch IRA actually describes it very accurately:

“An estate planning concept that is applied to extend the financial life of an Individual Retirement Account (IRA) across multiple generations. A stretch IRA strategy allows the original beneficiary of an IRA to distribute assets to a designated second-generation beneficiary, or even a third- or fourth-generation (or more) beneficiary.

By using this strategy, the IRA can be passed on from generation to generation while beneficiaries enjoy tax-deferred and/or tax-free growth as long as possible. The term “stretch” does not represent a specific type of IRA; rather it is a financial strategy that allows people to stretch out the life – and therefore the tax advantages – of an IRA.

Stretching out an IRA gives the funds in the IRA more time – potentially decades – to compound tax-deferred. This provides the opportunity to grow the funds significantly for future generations.

With a traditional IRA, the owner has to begin taking the required minimum distribution (RMD) by April 1 of the year after turning 70.5.

The RMD is calculated by taking the account balance on December 31 of the previous year, and dividing that number by the number of years left in the owner’s life expectancy (as listed in the IRS’ ‘Uniform Lifetime’ table.) Each year, the RMD is calculated by dividing the account balance by the remaining life expectancy.

Non-spousal heirs of any age, regardless of the type of IRA, must take RMDs based on their life expectancy. The younger the beneficiary, the lower the RMD, which allows more funds to remain in the IRA to stretch the IRA over time.”

Implementing the Stretch IRA

Most folks like my cousin just make their spouse the beneficiary.

If he does that, she will have a few options on when she starts taking distributions depending on her age, but at the end of the day the money that was once part of his account will be made available and taxed over her remaining lifespan.

Related: Why You Need to Start Your IRA NOW…and Any Other Tax-Free or Tax-Deferred Vehicle You Can

If Mike were to employ the IRA stretch concept, especially since there is a low likelihood he and his wife would ever need the money anyway, he could make his daughter the beneficiary.

This will possibly reduce or defer inheritance taxes, while giving his account more years to compound and grow since his daughter has a longer lifespan than his wife, thus stretching out the number of years they can spread out distributions from the account.

Personally, I’m taking it a step further with my grandson being beneficiary, since I already know my spouse and kids are pretty well set.

Threats to the Stretch

Obviously, we all want to avoid taxes, so it’s very important it is to have the right advisor (see article: Who’s Your Financial Advisor?).

But, it’s also just as important to teach your heirs how these things work. If you’ve already passed and they don’t understand, then guess who wins…the government.

Another potential threat to the stretch is legislation. In a recent decision by the US Supreme Court, it stated that inherited IRAs are not ‘retirement funds’ according the bankruptcy code and thus not protected.

Now, when doing estate planning, you’ll need to be more particular than ever when considering potential beneficiaries of your IRAs. I’m sure a properly worded trust can protect the assets from the financially distressed beneficiary.

But, I’m just thinking of pouring another drink and maybe taking another dip in my cousin Mike’s pool, so I certainly don’t blame those who think it’s too much work.

Regardless, the IRA Stretch is a valuable and underutilized estate planning strategy, especially for those who are establishing a portfolio of notes or real estate properties, which have enough liquidation value or will produce enough cash flow to support them in their retirement years.

So, for those on BiggerPockets, what strategies are you employing or considering for your estate planning? And, how far are you stretching your IRA?

Be sure to leave your comments below!

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


  1. “Death and taxes may be the two certainties in life but death does NOT get worse every time Congress is in session.”

    That sounds like a Will Rogers quote but I am not sure.

    The big worry that I have is the amount of Federal Debt, recognized and unrecognized and what will happen when the bill comes due. See

    There are several “juicy targets” that Congress can hit to raise significant revenue. One is retirement accounts, especially large retirement accounts and even large Roth IRAs. Even though the account holder has already paid the taxes on the funds that went into a Roth IRA, Congress could justify taxing the gains further (since no taxes have been paid on those gains) or on accounts greater than some large dollar figure ($2 million? “since that was excessive returns earned in order to accumulate $2 million”).

    But your whole article points to the need to plan ahead and talk about these plans with someone who knows the rules, the tax implications, the legal implications and more importantly, can analyze the issue with a dispassionate eye.

    Thanks Dave

    • Dave Van Horn

      Hi Kevin,
      I appreciate your comment, and thank you for sharing your perspective.
      I only can base my decisions off of the current tax code and utilize the best strategies possible for what’s known today. That being said, I know the government can change anything under the sun at any given time, which is another reason that I don’t put all of my eggs in one basket per say.
      For example, they’ve also talked about taking away the mortgage interest deduction. This is why I recommend utilizing multiple investments in multiple asset classes, as the odds of them changing the tax code on every category at the same time is very slim.
      Thanks for reaching out!

  2. Just read a pretty good book by Ed Slott titled Parlay Your IRA into a Family Fortune. Pretty simple read for such an important topic but I agree that most of us have a spouse as a beneficiary when we should really have a child or a grand child as the beneficiary.

  3. Brett Synicky on

    Great post Dave! I’ve heard of the stretch IRA but I don’t recall ever hearing it explained. It’s a fascinating concept to consider. I supposed it’s also up to us parents to teach our beneficiaries to be good stewards.

    Thanks again!

    • Dave Van Horn

      Hi Brett, thanks for the positive feedback! The book mentioned by Mike, “How to Parlay Your IRA into a Family Fortune” by Ed Slott, is a great book that really explains the Stretch IRA. He also appears on pbs if you ever get a chance to watch him.

  4. Funny story….I was just discussing this type of thing with my wife last night.

    I was doing some forecasting yesterday. Using some rosy projections, I could accumulate several million dollars which started me thinking about the Roth IRA vs traditional IRA question again. I have the answer to that question now. 🙂 I found some good online calculators (unlike when I searched a few years ago) and played around. Two things I realized during this exercise which I never really considered before are 1) your taxes will double when your spouse dies. This could be VERY IMPORTANT if your wife outlives you by 20 years which has been the case in my family for EVERY grandparent and now my Mom is looking like the same scenario. 2) You should use your average tax rate when calculating the tax effect on distributions, and you should use your marginal tax rate when calculating the tax effect on contributions (and conversions).

    I was explaining all this to my wife last night and bemoaning the fact that one stupid mistake by her or our kids (all less than 11 years old right now) could cost $1mm plus in taxes and negate my lifetime of effort and knowledge gathering. She sagely advised me that it was my job to educate them on these matters so that will not happen. THAT is the most important thing of all if you have plans of accumulating wealth and sharing it with current and future generations.

    • Jason, given their contribution limits, I have to know how one can accumulate “several million dollars” in their traditional or Roth IRA. Or, maybe I am misunderstanding. 🙂

      • Dave Van Horn

        You’re limited in the amount you can contribute each year, but you’re not limited in how much your IRA can make. For example, when I first left corporate America, I took my pension plan and rolled it to a traditional IRA, and then I rolled my traditional IRA to a Roth. And, it was about a $17,000 tax bill, but I didn’t mind, because the first deal I did in my IRA a few months later was that I bought a property for 40K and flipped it for 80K. Since then, I never looked back.
        Or, another example is Mitt Romney’s situation.

        • Smart move Dave

          It makes sense to take greater risks with the funds inside a Roth IRA than any funds left in a traditional IRA (assuming only partial conversion) or in non retirement accounts.

          It would make little sense to convert a Trad to a Roth and then invest in T-bills.

        • Smart move Dave

          It makes sense to take greater risks with the funds inside a Roth IRA than any funds left in a traditional IRA (assuming only partial conversion) or in non retirement accounts.

          It would make little sense to convert a Trad to a Roth and then invest in T-bills.

  5. Of course, Jeff.

    I may have unintentionally mislead because I interchanged plan types. When I say IRA, I also mean 401k. I have access to both. I have consistently contributed to my workplace 401k’s; I have also consistently rolled those balances into an IRA when I changed employers. I have also made an IRA contribution here and there over the years, but most of my balance has come from 401k contributions rolled into the IRA.

    Despite the nomenclature above, consider this example. I contribute $5,500 to an IRA for 40 years, say age 22 to 62. I stop then. I never touch the money and die at 82. Assume an 11.5% return (this is my rosy projection in first post). My calculations say I have $3m+ at death. What do you come up with?

    Now, the question your are asking yourself is why am I saving all that money in a retirement account if I never plan on spending it? Good question! I don’t have a good answer other than that is the way my mind and personality work. I also have a few rental properties. (Bought #4 last week.) That’s why I am here! I am counting on the rental property cash flows to replace my income (about 30 needed) and the retirement accounts are just cushion or gravy or whatever. Well, truthfully, I am trying to have enough in the retirement accounts to replace my income AND have enough in rental property to replace my income. This way, I (and my wife after I am gone – see above) should always be secure. I figure I can’t totally fail at investing AND real estate, right?

    I believe an article by you, Jeff, (or could’ve been Van Horn) a couple of months ago made me start thinking about cash flow during the distribution phase. The article also made me think about the tax liability of the cash flows too. (very important!) More later….gotta run!

    • It wasn’t an article by me. It was the “real” Jeff: Jeff Brown. I’m just a nobody with a few rental properties. 😉

      I was projecting a more conservative 7% for 30 years. Yes, at the rosy 11.2%, for 40 years, I do get the same. That is quite rosy though. 🙂

      Sounds like you and I have the same goals (not quite 30 doors for me though). I’ve added a performing note to my portfolio as well. It’s a conservative 9% at 15 years, but I do like the cash-flow without actually having another door.

  6. I’m not clear on this strategy and the timing of your article is great as I am the executor of my parents’ estate. My dad recently passed away and my mom is the beneficiary of his traditional IRA and his Roth IRA both held in a revocable trust, and 3 kids are the beneficiaries after mom passes. Can those IRAs pass through directly to my mom’s traditional and Roth IRAs without passing through taxes? He just passed away so we have not done anything yet.

  7. Dave Van Horn

    Hi Shari,
    Yes, as long as she’s the primary beneficiary, the traditional IRA dollars can go straight to her traditional IRA, and the Roth IRA dollars can go straight into her Roth IRA. Are all of the accounts with the same custodian?

    • Mom is the beneficiary of both accounts. I found out mom only has a ROTH (with the same custodian) and no traditional IRA. I guess we have to open one up for her so it can be put dad traditional IRA in there. I still don’t understand how the “stretch” works after she passes. There are 3 kids and equal beneficiaries on each account but it seems to obvious to be a strategy.

      • Dave Van Horn

        The Stretch IRA is a different strategy than what you are dealing with currently. The stretch would be if a father had a ROTH and he made his children, or even grandchildren, the primary beneficiaries (split up 33% each for 3 kids). They would be required to take a minimum distribution each year over for the rest of their life (minimum calculated based on life expectancy). For a younger, non-spousal heir, he/she could take a lower RMD, which allows more money to stay in the IRA longer, and if invested wisely, it would be building tax-free and tax-deferred for that time. It wouldn’t pass through taxes until those beneficiaries pass.
        I hope this info helps! Please let me know if you have any additional questions on this strategy.

  8. Dave,
    Interesting article as I myself have wondered about this topic for awhile now too. I’ve also seen some articles dealing with Obamas 2015 budget proposal adding the RMD to Roth IRA’s similar to traditional and capping the amount you can have in your IRA. Here’s one of the articles. I’m curious as to what will come of it.

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