There is an old sing-along about this bone being connected to that bone. When it comes to financial planning, there is a similar type of interconnectedness. Your retirement plan is going to lead to a plan that addresses the expenses that you may face during your twilight years. The planning will ultimately culminate in the distribution of your estate to your loved ones.
Retirement planning is typically going to include an individual retirement account. When you contribute into an individual retirement account over a number of years, you accumulate a nest egg that you could draw from after you put your working years behind you.
These accounts can be an important part of your retirement plan, but an IRA can also be used for estate planning purposes under some circumstances. Before we explain, let’s look at the two different types of individual retirement accounts that are typically utilized.
Traditional Individual Retirement Accounts
With a traditional individual retirement account, you make contributions into the account before you pay taxes. Withdrawals from the account are subject to taxation.
You can start taking penalty-free withdrawals when you reach the age of 59.5. Even if you don’t need the money, you are required to take mandatory minimum distributions when you reach the age of 70.5.
Roth IRAs
There is another type of individual retirement account called a Roth IRA. These accounts work in the reverse fashion when it comes to taxation. You make contributions into the account after you pay taxes on the income, but you do not have to pay taxes if and when you make withdrawals.
It is possible to take withdrawals without suffering any penalties when you reach the age of 59.5, but you are not required to take mandatory minimum withdrawals.
Stretching an IRA
Now we can get into the estate planning benefits. If you do not have to use the money yourself, you could leave your IRA to a beneficiary. The beneficiary would be required to take mandatory minimum distributions. The amount that must be withdrawn would be calculated based on the life expectancy of the beneficiary.
While the assets are in the account, there is going to be growth. The beneficiary could stretch the IRA by taking minimum withdrawals for the maximum amount of time. This is what stretching an IRA is all about.
With a traditional IRA, there will be taxes on the distributions, but there will be tax deferred growth. When a Roth IRA is stretched, the benefits are even greater. The account is going to grow tax-free, and the distributions to the beneficiary will not be subject to income taxes.
Plus, with a Roth IRA you don’t have to take distributions yourself while you are living, and this will leave more for the beneficiary in the first place.
Free Report on Individual Retirement Accounts
If you would like to learn more about the estate planning benefits of individual retirement accounts, download our free special report on the subject. You can access the report through this link: Free IRA Report.
Mark S. Eghrari, Estate Planning Attorney
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