What is a Nonqualified Stretch, and How Does It Work?

Shawn Plummer

CEO, The Annuity Expert

Retirement planning is a crucial part of financial management, and several options are available to save for retirement. One of the strategies that have gained popularity in recent years is a nonqualified stretch. But what exactly is a nonqualified stretch, and how does it work? This guide will discuss this retirement savings strategy in detail, including its benefits, limitations, and how it can fit into your overall retirement plan.

What is a Nonqualified Stretch?

A nonqualified stretch is a retirement savings strategy that allows individuals to pass on their IRA account or 401(k) to their beneficiaries upon death. It is called a “nonqualified” stretch because it is not subject to the same tax-qualified rules as a traditional IRA or 401(k).

What Is A Nonqualified Stretch

How Does it Work?

To set up a nonqualified stretch, an individual must name a beneficiary to their IRA or 401(k) account. After the individual’s death, the beneficiary can take the required minimum distributions (RMDs) over their lifetime or a lump sum payment. The nonqualified stretch allows the beneficiary to “stretch” the distributions over their lifetime, providing potential tax benefits.

Benefits of a Nonqualified Stretch:

  • Tax benefits: With a nonqualified stretch, the beneficiary can take distributions over their lifetime, potentially reducing the tax burden.
  • Flexibility: The beneficiary can take distributions as needed rather than being forced to take a lump sum payment.
  • Legacy planning: A nonqualified stretch allows individuals to pass on their retirement savings to their heirs, providing a legacy for future generations.

Limitations of a Nonqualified Stretch:

  • No contribution limits: Unlike a traditional IRA or 401(k), there are no contribution limits for a nonqualified stretch.
  • No tax deduction: Contributions to a nonqualified stretch are not tax-deductible.
  • Potential tax implications: While a nonqualified stretch can provide tax benefits, there may be tax implications for the beneficiary, depending on their tax bracket and the distribution amount.

Next Steps:

In conclusion, a nonqualified stretch can effectively pass on retirement savings to future generations while also taking advantage of potential tax benefits. However, it’s essential to understand the limitations and potential tax implications before jumping in. As with any financial solution, consulting with a financial advisor is highly recommended. A professional advisor can provide personalized direction that helps you make the decisions that best fit your financial situation. If a nonqualified stretch could be suitable for you, why wait? Request a free quote today and find out how your retirement savings goals could become achievable.

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Who can set up a nonqualified stretch?

Anyone with an IRA or 401(k) account can set up a nonqualified stretch by naming a beneficiary.

Can a non-spouse beneficiary do a nonqualified stretch?

Yes, a non-spouse beneficiary can do a nonqualified stretch.

What happens if the beneficiary dies before the account is depleted?

If the beneficiary dies before the account is depleted, the remaining balance can be passed on to the beneficiary.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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