Retirement planning is a long-term endeavor. It can be hard to wrap your head around a time when you will be in your late sixties when you are younger, but time marches on. Accumulating the resources that you will need to retire in comfort can be difficult, so you should start looking ahead as soon as possible.
An individual retirement account can be part of the plan. In this post we will look at the two different types of individual retirement accounts that are widely utilized.
Traditional Individual Retirement Accounts
With a traditional individual retirement account, you make pretax contributions into the account on an ongoing basis. Because the contributions are made before you pay taxes, you do have to pay taxes when you start to take distributions from the account.
You can make penalty-free withdrawals when you reach the age of 59.5. Under limited circumstances, you could potentially draw from the account before you reach this age without incurring any penalties. If you are purchasing your first home or if you are faced with unpaid medical expenses, you could potentially make penalty-free withdrawals.
With a traditional individual retirement account, you are required to take mandatory minimum withdrawals when you are 70.5 years of age. This is because you never paid taxes, and the government wants to get its share eventually.
Because of the fact that you have to take withdrawals, these accounts are not particularly useful from an estate planning perspective, but there could be exceptions to this rule under certain circumstances.
In addition to traditional individual retirement accounts, there are also Roth IRAs. When you have a Roth individual retirement account, you make contributions into the account after you pay taxes on the income.
The same scenario exists with regard to penalty-free withdrawals. You can start to take money out of the account without incurring any penalties when you are 59.5 years of age.
Their are two big difference between a traditional individual retirement account and a Roth IRA. You do not have to pay taxes on the withdrawals, because you contribute after-tax income into the account. Plus, you are not required to take mandatory minimum withdrawals at any time.
Because of the fact that you are not required to take withdrawals, these accounts can be intentionally used for estate planning purposes.
If the beneficiary of the account is someone other than your spouse, he or she would be required to take mandatory minimum withdrawals after your passing. However, the beneficiary could take nothing but the minimum that is required by law.
As a result, the tax-free growth of the account would be maximized. This is called “stretching” an IRA.
If you would like to learn more about the estate planning benefits of individual retirement accounts, download our special report. The report is being offered on a complimentary basis, and you can access your copy through this link: Free IRA Report.
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