How to “Stretch” Your IRA

2

“Stretch” IRA basics

Q: What Is a “Stretch” IRA?

A: A Strategy to Extend the Life of Your IRA

Val

ueTime

3

Is a “stretch” IRA right for you?

Q: Will You Need Your IRA to Generate Income in Your Lifetime?

Your Answer Your Strategy

Yes No “stretch”

My spouse will need Delay “stretch”

No Consider “stretch”

4

Is a “stretch” IRA right for you?

Q: Do You Have Young Beneficiaries Who Could Benefit From a “Stretch” Strategy?

Your Answer Your Strategy

Yes Consider “stretch”

No Consider charitable giving

5

Benefits of a “Stretch” IRA

1. Extend the life of your IRA over your beneficiary’s

2. Maximize potential tax-deferred growth

3. Create a legacy for your heirs

6

5 steps to maximize a “Stretch” IRA

1. Start early to accumulate assets

2. Delay income distributions in retirement

3. Take only minimum distributions once age 70½

4. Name designated beneficiaries

5. “Stretch” big with a Roth IRA conversion

7

Age 22-65 Age 30-65 Age 40-65 Age 50-65$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000$1,595,961

$906,196

$434,001

$193,961

Start early

Contributions Compound Over Time – Ending Value of Maximum Annual IRA Contributions*

* The maximum allowable contribution for individuals under age 50 is $5,500 per year, and $6,500 per year for those age 50 and older.

Source: BlackRock. The example is hypothetical and does not represent any particular investment. Assumes 7% annual return.

8

59.5 60.5 61.5 62.5 63.5 64.5 65.5 66.5 67.5 68.5 69.5 70.5$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

No distributions until age 70½ 5% inflation-adjusted withdrawals, beginning age 59½

Age

Ac

co

un

t V

alu

eDelay income distributions

$210,485

$102,393

Distributions Can Prematurely Deplete Savings – Impact of Delaying Distributions to Age 70½

Source: BlackRock. Assumes compounded annual return of 7%. 5% inflation-adjusted withdrawals based on beginning balance of each year. This example is hypothetical and does not represent any particular investment. May not represent the required minimum distribution after age 70½.

9

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85$80,000

$90,000

$100,000

$110,000

$120,000

$130,000

$140,000

7% return, required minimum withdrawal 7% return, 6% inflation-adjusted withdrawal

Age

Ac

co

un

t V

alu

eTake minimum distributions

$128,656

$95,744

Distributions Can Have a Large Impact Over Time

Source: BlackRock. Assumes starting balance of $100,000 and compounded annual return of 7% over 15 years. Withdrawals are calculated using the balance at the beginning of the year. Required minimum distributions are calculated using the Uniform Lifetime Table. This example is hypothetical and does not represent any particular investment.

10

Name beneficiaries to maximize “stretch”

Comparing Total Distribution to Stretch

“Shrink” “Stretch”

IRA with estate as beneficiary

Heirs choose to distribute all assets in a lump sum

IRA with 10-year-old grandchild named as beneficiary

Assets distributed over grandchild’s lifetime (72 years)

Value of inherited IRA $250,000Income Tax (28%) -$70,000

Total to Heirs $180,000

Total Lifetime Distributions $7,368,775Income Tax (28%) -$2,063,257

Total to Heirs $5,305,518(over 82-year life expectancy)

This example illustrates the benefit of naming an individual beneficiary rather than an estate. The value of the inheritance is $250,000. All examples assume 7% annual investment return. This example takes into account the effects of 28% income tax on distributions, but does not take any estate tax into account. This example assumes the IRA owner designated the beneficiary before the required beginning date and the first required minimum distribution was taken on or before December 31 of the year following the IRA owner’s death using the life expectancy method. For illustration only; results shown are not intended to represent the performance of any investment. Actual results may vary. Please keep in mind that possible changes in income tax rates, the impact of inflation and other risks may cause this investment to be less advantageous in the future.

11

Name beneficiaries to maximize “stretch”

Beneficiary designations must satisfy the following for a “stretch” to be allowed:

All named beneficiaries must be individuals*

Individual must be a beneficiary as of the date of the owner’s death

Individual must remain a beneficiary as of September 30 of the year following the owner’s death

* Exceptions apply for certain trusts.

12

Can a trust “stretch” an IRA?

Yes, provided the following conditions are met: The trust is valid under state law

The trust must be irrevocable or become irrevocable upon the owner’s death

Certain documentation regarding the trust beneficiaries is provided to the plan administrator or custodian by October 31 of the year following the owner’s death

The trust’s beneficiaries must be clearly identifiable

All beneficiaries must be individuals

13

John Smith’s Living Trust Beneficiaries

Wife Age 65 50%

Children from previous marriage

John Age 40 25%

Jane Age 35 25%

Oldest trust beneficiary will determine the “stretch” period

Account can be stretched over a 21-year period.*

* Based on the single life expectancy table found in IRS Publication 590. For illustrative purposes only.

14

Alternative to trust as beneficiary

Account can be stretched over 21, 43.6, and 48.5 years respectively.*

* Based on the single life expectancy table found in IRS Publication 590. For illustrative purposes only.

Primary beneficiary Wife: 50%

John Smith: 25%

Jane Smith: 25%

Contingent beneficiary John Smith’s Living Trust

Trust Beneficiaries

Wife Age 65 50%

Children from previous marriage

John Age 40 25%

Jane Age 35 25%

15

Minors as beneficiaries

If a minor inherits property, court intervention is commonly required to determine who can act on behalf of the minor.

Consider using the following alternatives:

A trust

The Uniform Transfer to Minors Act (UTMA)

• John Smith C/F

• Jane Smith – UTMA – IL

16

Default designations

It is important to know the default designations on your account. Traditional designations pass interest to surviving primary beneficiaries first.

Primary beneficiary Contingent beneficiary

John Smith(Owner)

Karen(Daughter)

33.3%

Doug(Grandson)

Ryan(Grandson)

Brittney(Granddaughter)

Brendan(Grandson)

Alex(Grandson)

Barbara(Daughter)

33.3%

John(Son)33.3%

17

Default designations

It is important to know the default designations on your account. Traditional designations pass interest to surviving primary beneficiaries first.

Primary beneficiary Contingent beneficiary

John Smith(Owner)

Karen(Daughter)

50%

Doug(Grandson)

Ryan(Grandson)

Brittney(Granddaughter)

Brendan(Grandson)

Alex(Grandson)

Barbara(Daughter)

50%

John(Son)33.3%

Traditional Traditional

18

Default designations

It is important to know the default designations on your account. Traditional designations pass interest to surviving primary beneficiaries first.

Primary beneficiary Contingent beneficiary

John Smith(Owner)

Karen(Daughter)

33.3%

Doug(Grandson)

Ryan(Grandson)

Brittney(Granddaughter)

Brendan(Grandson)

Alex(Grandson)

Barbara(Daughter)

33.3%

John(Son)33.3%

Traditional Traditional

19

Per Stirpes designation

If a primary beneficiary is deceased or disclaims, his or her interest is split equally among his or her heirs. Children by representation is utilized as an alternative in some states.

Primary beneficiary Heirs of primary beneficiary

John Smith(Owner)

Karen(Daughter)

33.3%

Doug(Grandson)

Ryan(Grandson)

Brittney(Granddaughter)

Brendan(Grandson)

Alex(Grandson)

Barbara(Daughter)

33.3%

John(Son)33.3%

Per stirpes

20

Per Stirpes designation

If a primary beneficiary is deceased or disclaims, his or her interest is split equally among his or her heirs. Children by representation is utilized as an alternative in some states.

Primary beneficiary Heirs of primary beneficiary

John Smith(Owner)

Karen(Daughter)

33.3%

Doug(Grandson)

Ryan(Grandson)

Brittney(Granddaughter)

Brendan(Grandson)

16.65%

Alex(Grandson)

16.65%

Barbara(Daughter)

33.3%

John(Son)

Per stirpes

21

“Stretch” big with a Roth IRA conversion

† Reflects the use of $350,000 from taxable account to pay taxes on conversion to Roth IRA.

The above illustration is hypothetical, does not account for estate taxes and is not a predictor of the actual amounts that will be paid from the IRAs, which may be less than the amounts in the illustration because the actual rate of return and deferral period before the owner’s death may be considerably less than what has been assumed. There is no guarantee that a beneficiary will receive the amount projected in the illustration since the owner can elect to take distributions in any amount during his or her lifetime or give the funds to a charity upon death.

To Convert or Not to Convert a $1,000,000 Traditional IRA

Traditional IRA Roth IRA Conversion

Starting Value Inherited Value Value at End of “Stretch”

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

1.004.14

17.31

Starting Value Inherited Value Value at End of “Stretch”

$0

$5,000,000

$10,000,000

$15,000,000

$20,000,000

1.35

4.53

Traditional IRA Roth IRATaxable account

Assumptions No withdrawals other than RMDs taken

Owner’s current age: 65 years

Owner’s age at death: 85 years

Beneficiary’s age at inheritance: 55 years

Beneficiary’s payout period: 28.7 years

IRA rate of return:7%

Taxable account after-tax return: 5.9%

Taxes paid from IRA upon conversion:35%

Taxes paid on all RMDs: 30%

*

13.68

*

22

Important notes

Investing involves risk. This material is provided for educational purposes only and does not constitute investment advice. The information contained herein is based on current tax laws, which may change in the future. BlackRock cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided in this publication or from any other source mentioned. The information provided in these materials does not constitute any legal, tax or accounting advice. Please consult with a qualified professional for this type of advice.

Please see the Internal Revenue Service’s website at www.irs.gov for more information and rules about IRA distributions.

BLACKROCK is a registered trademark of BlackRock, Inc.

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

© 2012 BlackRock, Inc. All Rights Reserved.

12/12 USR-1231