What is a stretch IRA?

Answer 1

When you reach age 70 and one-half you will be required to withdraw a minimum annual distribution. At death the person or persons you name as beneficiary/s will be able to take this annual minimum distribution over the life expectancy of the beneficiary. Since the calculation is reset to a younger life expectancy the distributions are stretched out. If a grandchild is named a beneficiary the measuring life is even longer and the IR distributions are stretched out for an even longer period.
If you take a distribution it is taxable and if a beneficiary takes a distribution it is taxable. You don't pay a 10% early withdrawal penalty because you are over 59 and one-half. Your beneficiary would not pay the 10% early withdrawal penalty because they are receiving the distribution because of your death and this is an exception to the penalty assessment.

Answer 2

A Stretch IRA is a term commonly used to describe an IRA established to extend the period of tax-deferred earnings, typically over multiple generations.

In the short run, you can use the concept to reduce the required withdrawal you must take from the account if you're retired or at least age 70 1/2, and you'll cut your current income tax bill as well.

Meanwhile, because you are extending the IRA payout until your grandchildren retire (or further, if appropriate), you get substantial additional deferral years to compound the earnings growth. Depending on the earnings and payout rates, potential payouts may approach multi-million-dollar levels.