What Is a Multi-Generational IRA?

by Wilhelm Schnotz ; Updated July 27, 2017

One of the reasons investors like IRAs is the accounts’ ability to defer taxation. Rather than pay income taxes on earnings, that money heads into the account and is only taxed when beneficiaries access it. Because of this, all of an investor’s money starts earning returns, not just the portion that remains after taxation. Multi-generational IRAs, which are also known as stretch IRAs, apply that principle, but look at a longer time-frame, naming a child as a beneficiary.

Long-Term Investment Strategy

Instead of receiving disbursements from your IRA when you turn 70 1/2, as required, a stretch IRA names your children, or grandchildren as the beneficiaries. Funds placed in a properly structured multi-generational IRA don’t mature until the beneficiary reaches retirement age. If you name your 6-year-old granddaughter as the beneficiary of an IRA with $300,000 in it when you die and it grows at a relatively modest 7 percent rate, the account will hold $19.8 million by the time it matures when she’s 66. You’re still forced to take minimum distributions on your account as defined by the tax code, though in many cases, this won’t deplete your investment during your lifetime.

After You Die

Once you die, your heirs inherit the IRA as if it were their own, and cannot take distributions without incurring penalties until they reach retirement age. Because of this structure, the increased earning power of your tax-deferred investment stretches out long past your life, and continues to yield gains until its principle is depleted or your heirs retire and access the funds.

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Estate Taxes

Although they’re named the beneficiaries of a multi-generational account, those IRAs are still your assets. Your heirs will be liable for estate taxes if your total estate, including multigenerational IRAs and other investments, is worth more than the federal exemption for estate tax. As one of the 2011 tax year, estates worth more than $5 million are taxed at 35 percent; those worth less than $5 million are exempt from the tax. In order to avoid forcing your heirs to tap into the stretch IRA in order to meet estate taxes—which incurs an early-withdrawal penalty from the IRS—plan to have liquid assets available for your heirs to pay possible estate taxes.

Avoid Generation-Skipping Taxes

If you structure a multigenerational IRA and name a grandchild as your beneficiary, tax advisors caution you not to place more than $1 million in it. As of 2011, the exemption for the generation-skipping tax—a form of estate tax when wealth is passed directly to grandchildren—is $1 million. With a taxation rate for 2011 that’s yet to be determined, the tax burden on generation-skipping assets may be very heavy.

About the Author

Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.

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