The Benefits of a Non-Qualified Stretch IRA & FAQs
Firstly, if you would tend to answer YES to each of the following questions…then this would seem to indicate that this “Stretch Strategy” is, in all likelihood right for you!
- Are you interested in receiving a steady stream of income?
- Have you discussed tax implications on receiving a lump sum amount?
- Do you want your inheritance to remain tax-deferred?
- Are you concerned about how long your inheritance will last?
- Do you have a plan in place on how to protect and grow a lump sum amount?
What is a non-qualified stretch program?
A non-qualified stretch is a payment option reserved for a beneficiary that allows the beneficiary to “stretch” the death benefit or annuity payouts over his/her own life expectancy versus receiving the entire death benefit in one lump sum or by the fifth anniversary of the decedent’s death.
Note: The decedent must have died prior to his/her annuity start date for a beneficiary to choose this payment option.
Typical Annual Stretch Payment is based upon the Life Insurance or Annuity Account Value and/or Life Expectancy Factor, which is typically calculated on the beneficiary’s initial life expectancy factor calculated by using the then current IRS Single Life Table.
For beneficiaries, the life expectancy factor is determined using the beneficiary’s age as of the date of the first payment. This initial factor will be fixed as of the first payment. Each subsequent year, one is subtracted from the prior year’s life expectancy factor.
Questions about Beneficiaries?
Can any beneficiary of a non-qualified annuity choose the stretch option? No, non-natural beneficiaries such as estates, charities, or trusts cannot choose this option.
How often must the beneficiary withdraw money from the account?
The first annual payment must be distributed before the first anniversary of the decedent’s death. If the first annual payment is not distributed prior to the first anniversary, then the non-qualified stretch option will not be available and any death benefit will be distributed in a lump sum payment.
Can the beneficiary request installments for the stretch payments?
Yes. Installment withdrawals may be permitted, provided each annual payment is taken in its entirety. Certain Issuer’s offer monthly, quarterly, semi-annual, and annual payment method frequencies.
Questions about the account value?
When is the account value determined? Typically, the initial account value is determined on the day of the first payment; however, the value of all subsequent payments is based on the December 31st value from the previous year.
Will the stretch payment be the same value each year?
No. The stretch payment will differ on a yearly basis due to the account value and life expectancy factor changing each year.
Can additional money be withdrawn from the account?
Yes. The stretch payment is the annual minimum amount of money that must be withdrawn for compliance with the Internal Revenue Code (IRS).
Can additional money be added to the account?
No, additional contributions cannot be made.
What are the drawbacks for not withdrawing the annual stretch payment?
If a beneficiary fails to withdraw the first annual stretch payment prior to the first anniversary of the decedent’s death, he or she will not be able to stretch the remainder of the payments and the remaining account value must be withdrawn entirely by the fifth anniversary of the date of death.
If a beneficiary fails to withdraw a stretch payment in its entirety in any subsequent year, by December 31st, there may be unplanned tax consequences.
Disclaimers/Disclosures: Fixed index annuities are not a direct investment in the stock market. They are long term insurance products with guarantees backed by the issuing company. They provide the potential for interest to be credited based in part on the performance of specific indices, without the risk of loss of premium due to market downturns or fluctuation.
Although fixed index annuities guarantee no loss of premium due to market downturns, deductions from your accumulation value for additional optional benefit riders could, under certain scenarios, exceed interest credited to the accumulation value, which would result in loss of premium.
They may not be appropriate for all clients.
Interest credits to a fixed index annuity will not mirror the actual performance of the relevant index.
Under current law, annuities grow tax-deferred. An annuity is not required for tax deferral in qualified plans. Annuities may be subject to taxation during the income or withdrawal phase.
Please note that this information should not be viewed as providing legal, tax or investment advice. You should rely on your own qualified adviser.
FOR MORE INFORMATION CONTACT
Paul M. League, QFP—Qualified Financial Planner
Paul M League—Founding Principal of League Financial & Insurance Services
Email: Paul@LeagueFinancial.com | Website: www.LeagueFinancial.com
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