If you don’t need to use the money in your individual retirement account, you will naturally start to think about how it will fit into your inheritance plan. We will share all the important facts here, include a recent change that impacts IRA beneficiaries in a big way.
Traditional vs. Roth IRAs
The two commonly used individual retirement accounts are the traditional account and the Roth IRA, and the major difference between them is the timing of the taxation.
When you have a traditional account, you make pre-tax contributions into the account, and contributions into Roth accounts are made after taxes have been paid.
Predictably, distributions to Roth account holders are not taxable, but distributions from traditional accounts are subject to taxation.
People that have Roth accounts are never required to take distributions. Traditional account holders have to take required minimum distributions when they are 72. The age was 70.5 prior to the enactment of the SECURE Act, which was signed into law in December of 2019.
Both types of IRA account holders can take penalty free distributions when they are 59.5 years old. There is a 10 percent early withdrawal penalty, and the early distributions would be taxable.
However, you can take early withdrawals without being penalized for certain approved reasons. Money can be taken out of the account to pay unpaid medical bills, and if you are unemployed, you can take penalty free distributions to pay health insurance premiums.
Up to $10,000 can be removed from the account to help facilitate a first home purchase, and there is no penalty if you take distributions to pay higher education expenses.
Holders of both types of accounts can continue to make contributions indefinitely. Prior to the enactment of the SECURE Act, traditional account holders could no longer contribute into their accounts after they reached the age of 70.5.
Rules for Beneficiaries
When a spouse inherits an individual retirement account, they can retitle it as an inherited account or roll it over into their own IRA. Beneficiaries that are not spouses do not have the rollover option.
Non-spouse beneficiaries are required to take mandatory distributions on an annual basis. The amount of the distributions will be based on the age of the individual in question and the balance in the account. A younger beneficiary would be compelled to receive less than an older counterpart.
Up until this year, there was a widely utilized estate planning strategy called the “stretch IRA” that was particularly beneficial to Roth account beneficiaries. Beneficiaries would take only the minimum that was required by law for as long as possible to maximize the tax tax-free growth.
The SECURE Act put an end to this very useful approach. A beneficiary must now withdraw all the money that is in an inherited individual retirement account within 10 years.
Attend a Free Webinar or Seminar
We have traditionally conducted seminars on an ongoing basis to share important information about estate planning and nursing home asset protection with our neighbors. The pandemic has impacted our ability to hold the sessions, but webinars are the next best thing.
You can get all the same information delivered to you in real time while you are sitting on your couch at home, so this is a great way to invest a little bit of spare time. These webinars are offered free of charge, but we ask that you register in advance so we can reserve your spot.
If you head over to our seminar/webinar page you can obtain more information.
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We are here to help if you are ready to work with an attorney to put an estate plan in place. You can send us a message to set up a consultation appointment, and we can be reached by phone at 631-265-0599.
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