Stretching your IRA: Don't forget to tell the kids.

If you have an individual retirement account and you want to leave it to your spouse, there's no problem. After your death, your spouse can transfer the assets into his or her own IRA, where the money can sit untouched until age 70½, when required minimum distributions begin.

Non-spouse beneficiaries, such as children and grandchildren, don't have this option: They have to keep the account as a separate inherited IRA and begin taking distributions by Dec. 31 of the year after inheriting. But they can choose to receive the money slowly, using a distribution schedule based on their life expectancy. This is known as the "stretch" IRA--and it may be a smart move, because it can extend the period of potential tax-deferred growth, possibly over several generations.

The strategy can be even more appealing with an inherited Roth IRA. Unlike with a traditional IRA, there are no required distributions for the original owner of a Roth, which means you can leave the account untouched and then bequeath it to your heirs. And because a Roth's earnings aren't subject to income taxes, your heirs could potentially enjoy years of growth that's not merely tax-deferred, but tax-free--assuming, of course, that they use the stretch strategy.

Whether your heirs are dealing with a traditional or Roth IRA, some specific rules have to be followed to make the stretch IRA work. A financial advisor can help here. While you can take money out of your own IRA and put it back into another one within 60 days, that doesn't work with an inherited IRA. Instead, the money has to move from one custodian to another in a "trustee-to-trustee" transfer. Also, non-spouse beneficiaries have to re-title the IRA and indicate that it is inherited. The title might say: "John Doe, deceased, inherited IRA for the benefit of Mary Doe, beneficiary."

But perhaps the biggest risk is that your beneficiaries don't understand the stretch IRA's advantages and they might cash out the account upon your death--thus losing the chance to enjoy years of tax-deferred, or even tax-free, earnings growth. The implication: Maybe it's time for a chat with your IRA's beneficiaries.

INVESTMENT AND INSURANCE PRODUCTS: NOT FDIC INSURED • NOT A BANK DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NO BANK GUARANTEE • MAY LOSE VALUE

Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

There is never a guarantee that these strategies will succeed. The strategies do not necessarily represent the experience of other clients, nor do they indicate future performance. The investment strategies presented are not appropriate for every investor.

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