An individual retirement account can provide a nest egg during your senior years, and the account can become part of your estate if you never need the money. There are also people that proactively use IRAs for estate planning purposes.
With the above in mind, we will deliver an overview of the rules for IRA beneficiaries in this post. But first, we will provide an explanation of the parameters that are in place for the initial account holders.
Traditional Individual Retirement Accounts
Contributions into a traditional IRA are made before taxes are paid on the income, so you get a tax break every year. On the other side of the coin, when you take distributions, they are subject to regular income taxes. You can contribute into a traditional IRA for an open ended period of time for as long as you are working.
You can choose to take penalty-free withdrawals after you turn 59.5 years of age. There is a 10 percent penalty for early distributions before age 59.9, and they would be subject to taxation, but there are a few exceptions. Penalty-free withdrawals are permitted to pay medical bills and higher education tuition. You can take out $10,000 to help purchase your first home, and you can withdraw funds to pay health insurance premiums if you are unemployed.
Theoretically, a person will be in a lower tax bracket when they retire, so the tax deferral has an inherent advantage.
Since the IRS wants to start getting some money eventually, you are compelled to take required minimum distributions (RMDs) when you are 72 years of age.
The major difference between a Roth individual retirement account and a traditional IRA is the tax arrangement. You make contributions into a Roth account after you pay your taxes, so distributions are not subject to further taxation.
There are no mandatory distributions at any age because the tax man has been satisfied. You can choose to take distributions without being penalized when you are 59.5, and the exceptions we described above apply to Roth accounts as well.
Rules for Beneficiaries
A spouse that inherits an individual retirement account, be it Traditional or Roth, can roll it over into their own account, or they can retitle it as an inherited account. This allows a spouse to continue growing the account for the remainder of the spouse’s lifetime, even if the time period exceeds ten years.
Beneficiaries who are not spouses cannot roll over the funds into their own existing accounts. Non-spouse beneficiaries are required to take distributions in one of three ways: all at once upon the death of the person they inherited it from, on an annual basis for up to a ten-year period, or all at once at the conclusion of the ten-year period.
Distributions to the beneficiary of a traditional retirement account are subject to income tax, but Roth account beneficiaries do not have to report the income.
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If you are ready to work with an attorney to put your estate plan in place, we are here to help. We can gain an understanding of your legacy goals and help you devise a custom crafted plan that ideally suits your needs.
You can schedule a consultation appointment if you call us at 630-568-8611, and we have a contact form on this site you can use to send us a message.