Your individual retirement account can help to ensure your financial security. As you contribute into it over the years it will grow, and the funds will be available to you during your golden years.
In a perfect world, you will never need the money. At that point, your individual retirement account will be part of your estate plan. You should understand the facts so that you can maximize the inheritance planning benefits.
Traditional IRAs vs. Roth Individual Retirement Accounts
You contribute into a traditional individual retirement account with pretax earnings. This is a good arrangement while you are walking along your career path, because you pay taxes on less income.
On the flip side of that equation, you have to claim the distributions that you take when you file your tax returns. When you reach the age of 59 ½, you can take money out of the account without being penalized.
Unfortunately, you cannot let the account accumulate throughout your life if you have no reason to make withdrawals. You are compelled to take required minimum distributions when you are 72 years old.
Why are you forced to take distributions? Since you never paid taxes on the income, the Internal Revenue Service wants to start getting their share before you pass away.
With a Roth individual retirement account, some things are the same, but there are a few significant differences. You make deposits into the account after you pay taxes on the income, so withdrawals are not subject to taxation.
The tax man has been satisfied, so you are not required to extract money from the account at any time. You can however take penalty-free distributions when you are 59 ½ if you choose to do so.
Regardless of the type of account that you have, you are allowed to continue to make contributions for an open-ended period of time.
Rules for IRA Beneficiaries
If the beneficiary of your individual retirement account is your spouse, they would have two options. A surviving spouse can roll the IRA over into their own individual retirement account, and the other choice would be to retitle it as an inherited account and become the beneficiary.
For non-spouse beneficiaries of either type of account, the parameters are different. Individual retirement account beneficiaries have to take required minimum distributions. Roth account beneficiaries do not pay taxes on these payouts, but they are taxable for traditional beneficiaries.
In December of 2019, the SECURE Act was enacted, and it changed the individual retirement account guidelines in some ways. Before this legislative measure came along, there was a very useful estate planning strategy called “stretching an IRA.”
The beneficiary would take only the minimum amount that was required by law for as long as possible. In so doing, they would take maximum advantage of the tax benefits. This approach was particularly beneficial for people that inherited Roth accounts.
Now, all of the resources must be cleared out of the account within 10 years. This is less than ideal, but there is some room for the beneficiary to stretch the account.
Need Help Now?
If you would like to discuss IRA inheritance planning or any other aspect of the process with an attorney that really cares about you and your family, our doors are open. We can gain an understanding of your position, explain your options, and help you put the ideal plan in place.
You can set the wheels in motion right now if you call us at (630) 568-8611, and there is a contact form on this website you can use to send us a message.
