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Here's a great way to give a gift that keeps on giving: The stretch IRA.

If you've never heard of a stretch IRA, or stretchout IRA as they are also called, you're not alone. Since the introduction of IRAs in 1974, folks have been well educated about what individual retirement accounts are, who they are for, why to use them and how to invest in them.

That education has paid off: At year-end 1998, for instance, mutual funds accounted for $934 billion of the estimated $2.1 trillion IRA market, according to figures from the Investment Company Institute, the trade association of the mutual fund industry.

But little has been done to teach folks about how to get the most out of their individual retirement accounts once it comes time to pass those bucks on to their heirs.

"In the past, we've all been well educated about the benefits of accumulating assets tax-deferred in our IRAs," says Christine Fahlund, senior financial planner at T. Rowe Price, (800-225-5132). " But people haven't really understood how much more money they could have to pass on if they had created a stretch IRA opportunity for their beneficiaries."

Passing on monies to your beneficiaries----whether they be friends, non-spouse, blood relative, child or any combination thereof--- is what stretch IRAs are all about. Sometimes it's beneficial for spouses too. "The stretchout, is stretching out the tax deferral and it can go on for years," says Fahlund. "You can do it with ROTH IRAs or regular IRAs."

While the subject is complicated one, turning an existing---or new--- IRA or ROTH IRA into a stretchout begins with educating yourself. To start that process, give the IRS a call, (800-829-3676), and request that the IRS Publication #590 titled, Individual Retirement Arrangements, be sent to you.

The next step is finding out whether or not the fund family your IRAs are held at are stretchout savvy. Many or not. If that's the case, you'll have to call various fund families, ask to speak with their retirement experts and see if stretchouts are part of their bailiwick.

After finding a fund family to work with, you'll need a concrete plan regarding the individual---or individuals---you'd like to have named as beneficiary(ies) on the account.

"The end of the year is a good time for people to review what they've done, and to do some future planning," says Julie Hendrickson, president of Sentinel Financial Services, (800-282-3863), a Montpelier. VT. fund family that's been teaching people about stretchouts via the Sentinel Super IRA Legacy Plan for the past five years. "Not everyone remembers who they've listed as their beneficiary and some may like to make some additions or changes."

Hendrickson said that if stretch IRAs are set up properly, they can allow the original owner to pass on wealth, and keep the IRA in tact with its assets growing tax deferred for years to come. But that they also are intricate financial planning tools. So to get the most out of them account beneficiaries need to be named before the owner starts taking his or her minimum required distributions from their IRAs.

If you like the notion of a stretchout and the control from the grave that it can give you, Fahlund says that the ROTH IRA is the way to go. "It's the ultimate. The premier vehicle for this because no minimum required distributions are ever required from the original owner of the account. So taking distributions out by age 70 1/2 goes by the boards. No one is required to take any money out of a ROTH IRA unless they want to."

Not taking distributions gives this account a chance to grow in value until its owner dies. At that time, the account's beneficiary(ies) must begin taking distributions by Dec. 31, in the year after the account owners death. A spouse who is named beneficiary isn't subject to that Dec. 31 rule.

Yes there are downsides to stretchouts---figuring out how they really work being the first. And choosing an institution as the account beneficiary is a no-no. (They don't have life expectancies, so they're out.)

But if you take the time, and have more money in your retirement account than you'll ever need in this lifetime, they are one inexpensive way to share your wealth with those you care for. At Sentinel, annual maintenance fees on their Super IRA currently runs $15 a year and at T.Rowe Price the maximum is $10 per fund.

To read more articles, please visit the column archive.

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