Do you have Individual Retirement Accounts (IRAs) (or other tax-deferred retirement accounts)* worth $200,000 or more per beneficiary? [*For clarity, I'll simply refer to "IRAs" for the remainder of this article, but please know this information also applies to Roth IRAs, 401(k), 403(b), 457, and other company retirement plans.]

Thanks to the IRS rules, your beneficiaries (the people who receive your IRAs after you are deceased) have the option to “stretchout” their taxable, required minimum distributions over their own life expectancy rather than having to cash out the account upon your death. This means your IRA monies could compound income-tax free for a much longer period and grow to be worth millions!

For instance, let’s suppose you have $350,000 in your IRAs upon your death, and your beneficiary is 50 years old when he or she inherits them. Assuming the accounts grow at 6% per year and your beneficiary only takes the required minimum distributions, just look at this incredible growth:

IRA Stretchout Calculation

t age 80, your beneficiary will already have received over $900,000 of distributions and still have nearly $300,000 remaining in your IRAs. (The remainder may continue to grow tax-free and be passed on to your grandchildren)!

As a result of the IRS “stretchout” rules, your IRAs, in time, may be worth over a million dollars, and become the largest assets you leave to your loved ones!

The problem is, this income tax “stretchout” is not automatic. You need to do proper advance planning. Your IRAs must have the right beneficiaries! And chances are, the ones you have now are not accurate!

You can name your children or other individuals as beneficiaries of your IRAs, but that may be a disaster! Why? Because…Your beneficiaries may unintentionally squander the income tax “stretchout” and potentially cost your family millions!

This might sound dramatic, but it happens quite often. It could happen because your beneficiaries are not aware of the tax rules and their distribution choices. Or, a beneficiary, influenced by their spouse or another unscrupulous third party, could just decide to withdraw your life savings and spend or invest it carelessly. 

And even if we assume that your beneficiaries do the right thing and maximize the income tax “stretchout” of your IRAs, your life savings may still be severely exposed to many threat without an asset protection plan including:

  • Your son-in-law or daughter-in-law cashing in on half (or more) of the inherited IRAs in a Divorce! (Keep in mind that the divorce rate in the U.S. is over 50% and that this large sum of inherited money may become a divorce incentive. Also, consider that your beneficiary might get married or re-married after you’re gone… and the new spouse just might be a “gold digger.”
  • Your beneficiaries may spend it all due to Bad Money Management (especially if some of your IRA proceeds eventually pass down to grandchildren or others who are young or financially inexperienced!)
  • Your beneficiaries’ Creditors and Lawsuits may seize all the Inherited IRAs!
  • Your beneficiary could lose his or her needs-based government benefits (if he or she ever needs them), including supplemental income (SSI) or long-term nursing care (Medicaid). Even if your beneficiary does not currently qualify for this assistance, an accident or major medical event could always trigger a need for future benefits.
  • If anything happens to your child, your in-laws could be a liability! If your child is married, they will likely name their spouse as beneficiary of the account—which means that if your child dies, the account will end up with your in-law!  From there, your in-law might blow it, get remarried and spend it with the new spouse, etc. leaving nothing to pass on to your grandchildren.
  • And even if your beneficiary never encounters any of these problems, he or she may get walloped with a huge estate tax bill when he or she passes your IRAs down to the next generation.


Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning