With a Stretch IRA, Don't Load Up on CDs

Dear Dr. Don, I have been looking for a safe bank with an above-average interest rate on a certificate of deposit for an individual retirement account with a term of three years. However, I want one that will handle a "stretch IRA." In my research, I found out one bank offers a stretch IRA at a 1.44% rate. That's OK. Another bank handles a stretch but offers only a 0.75% on all CDs with a term greater than one year.

I'm finding that most bank personnel, even at the upper levels, don't know what a stretch IRA is. I want this option because it will save my sons a lot of money over their lifetimes. It could also be very advantageous to the bank. But if they don't know about it, they can't take advantage of it. What a shame. Do you know of any banking institution that offers this tax-advantageous option? -- Michael Meister

Dear Michael, You've brought up an important point, one I learned from attending a presentation by Ed Slott, an IRA expert. The point is the custodian of the IRA, in this case a bank, has to be willing to offer a stretch IRA.

A stretch IRA allows the IRA beneficiaries to take the required minimum distributions over their lifetimes, keeping the money invested and growing longer than if the distributions were taken based on less-favorable terms required by a nonstretch custodial agreement. The naming of a contingent beneficiary can extend the stretch if the primary beneficiary were to die earlier than projected by the IRS life expectancy tables. Spousal beneficiaries have different options concerning distributions than nonspousal beneficiaries of an IRA account. It's worth talking this all through with your tax professional.

I don't have a listing of custodians willing to accommodate IRA account holders looking to set up a stretch IRA. You found some willing bank providers, and now you're just shopping for yield. I'd argue if you don't need the money other than for required minimum distributions, and you're looking for your beneficiaries to grow wealth in this account, you shouldn't be playing in the CD sandbox. Why aren't you looking to have a brokerage or mutual fund family as the custodian of your stretch IRA account?

I don't have your full financial picture, but there's a disconnect in how you plan to invest the IRA and the idea of this money being invested for the long term. Short-term CDs, as you've found out by shopping around, aren't likely to keep pace with inflation, much less grow in value. A diversified portfolio, with enough liquidity to fund any required distributions, would be better for the long haul than hanging out in one- or five-year CDs.

I'd describe a diversified portfolio as one with a mix of stocks, bonds and cash. Those holdings could be held as individual investments, but a mix of mutual funds or exchange-traded funds is likely to do the job just as well. The broker or mutual fund adviser can help you with the mix. Keep an eye on fees, commissions and annual expenses in deciding how to invest the money.