This scenario unfolded at the end of 2019 when the SECURE Act was enacted.
This measure impacted a widely utilized estate planning strategy called the “stretch IRA.” We will look at the implications here, but first, we have to provide an explanation of how individual retirement accounts work in a general sense.
The major difference between the two most commonly used types of accounts is the way that taxes are imposed. With a traditional account, you make contributions before you pay taxes on the earnings.
Since the IRS wants to get some money eventually, you are forced to take mandatory minimum distributions at some point. We will get to the age in the section that explains the SECURE Act changes.
You are allowed to take distributions without being penalized when you are 59 ½ years old, but there are a few exceptions.
You can use money in the account to pay for school tuition or unpaid medical bills, and up to $10,000 can be extracted to help finance a first home purchase.
Roth Individual Retirement Accounts
Roth account contributions are made after taxes have been paid, so you do not have to report withdrawals when you file your returns.
You never have to take distributions from this type of account, because the IRS go their money before the account was funded. The other details are the same with regard to the age at which you can take penalty free distributions and the exceptions to the rule.
IRA Rules for Beneficiaries
When a spouse inherits either type of individual retirement account, they can go in two different directions. A spouse could roll the inherited account into their own account or they could retitle it and become the beneficiary.
The dynamic is different for non-spouse beneficiaries. First, they are required to take mandatory minimum distributions. They are taxed if it is a traditional account, and Roth account beneficiaries would receive the payouts in a tax-free manner.
Before the SECURE Act came along, people would use a strategy called the stretch IRA as we have touched upon. They would take only the minimum that is required by law for the maximum amount of time.
This was especially beneficial for people that inherited Roth accounts, because of the tax-free distributions. Now, all of the resources must be taken out of the account within 10 years of the time that the beneficiary assumes ownership.
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To see the schedule, visit our webinar/seminar page. When you identify the session that works for you, follow the simple instructions to register so we can reserve your spot.
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