By Barry Zimmer on July 30th, 2020 in Estate Planning
Before we explain the current matter that is at the core of this post, we have to provide some necessary background information regarding individual retirement accounts.
There are two different types of individual retirement accounts that are typically utilized: traditional IRAs, and Roth IRAs. The major difference between the two types of accounts is the way that taxation is applied.
When you have a traditional individual retirement account, you contribute money into it before taxes are paid on the income. This is positive in the near term, because you pay taxes on less income. On the flip side, since taxes were not paid, distributions from the account are taxable.
A Roth IRA works in the reverse manner. You put money into this type of account after you pay taxes on the income, but there is no taxation on withdrawals that you take from the account.
The Internal Revenue Service wants to get their cut from traditional account holders at some point. Because of this, mandatory minimum distributions are required when an account holder reaches the age of 72. The age used to be 70.5, but it was increased when the CARES Act was passed at the end of 2019.
Roth account holders never have to take any money out of their accounts, because there is nothing in it for the IRS since taxes have already been paid. People with both types of accounts can continue to make contributions indefinitely with no age limit.
As it applies to traditional accounts, this is another change that came about because of a provision contained within the CARES Act. There was never any age limit for Roth IRA contributions.
Individual Retirement Account Beneficiaries
The non-spouse beneficiaries of both types of accounts are required to take required minimum distributions (RMDs).
Prior to the enactment of the CARES Act, a beneficiary could stretch out the distributions over an open-ended period of time to maximize the tax advantages. This new law included a mandate that all money must be cleared out of an inherited IRA within 10 years.
SECURE Act RMD Waiver
The SECURE Act was passed as a response to the economic carnage that has been wrought by the novel coronavirus. It has many provisions, and one of them applies to individual retirement account required minimum distributions.
Traditional account holders and beneficiaries of both types of accounts do not have to accept required minimum distributions in 2020. The RMD mandate has been waived for this year.
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