The resources that remain in your individual retirement account at the time of your passing will become part of your estate.
With this in mind, you should understand the rules that are in place for inherited IRAs, and we will take a look at the current guidelines and some potential changes in this post.
Traditional Individual Retirement Accounts
A traditional individual retirement account is funded with pretax income, so you get a tax break before you start taking distributions. However, the distributions are taxable. You can accept penalty-free distributions of the principal and the earnings when you are 59.5 years of age.
There are some exceptions to the rule with regard to the penalties. You can take up to $10,000 out of the account to help finance a first home purchase, and you can use the money to pay unpaid medical bills or school tuition.
When you are 72 years of age, you are compelled to take required minimum distributions because the Internal Revenue Service wants to start collecting its share at some point while you are living. You can continue to contribute into the account as long as you are earning income.
If your spouse inherits the account, they could roll it over into their own account or retitle it as an inherited account. For non-spouse beneficiaries, the rollover option is not available.
A non-spouse beneficiary is required to take minimum distributions, and they are subject to regular income taxes. Before the enactment of the SECURE Act, the account could stay open for any length of time, and stretching the IRA was recommended because of the tax benefits.
After the SECURE Act went into effect in 2020, a 10-year limit was imposed, so the assets must be cleared out of an inherited individual retirement account within 10 years.
The timing of the taxation is different with Roth individual retirement accounts. You contribute into the account after you have paid taxes on the income, so distributions are not subject to further taxation.
Withdrawals of the principal can be taken at any time without penalties, but the penalty-free distribution age is 72 for distributions of the earnings. You are never required to take distributions when you have a Roth individual retirement account.
When a beneficiary accepts distributions, they are not taxable, so the stretch IRA strategy was especially beneficial for Roth beneficiaries that inherited well-funded accounts.
SECURE Act 2.0
Last year, a piece of legislation called the Securing a Strong Retirement Act cleared the House Ways and Means Committee. It expands on the original SECURE Act, so it is referred to as SECURE Act 2.0.
One of the changes would increase the mandatory distribution age for traditional account holders to 75, but the change would be implemented over a number of years. Automatic retirement account enrollment for all eligible employees is part of the bill as well.
A lot of working people that have student loan debt pay down the debt with money that would otherwise be contributed into 401(k) accounts. This measure would give employers the latitude to provide 401(k) matches of student loan payments that were made by employees.
There is currently a $1000 savers credit for low-income employees that contribute into retirement savings accounts. This would go up to $1500, and the requirements would be loosened to include more workers.
The catch-up contribution for workers between the ages of 62 and 64 would go up to $10,000 if this bill becomes law.
Take Action Today!
As you can see from this post, there are a lot of details to understand when you are planning your estate. When you work with our firm, we will gain an understanding of your situation and provide recommendations so you can make fully informed decisions.
If you are ready to get started, you can schedule a consultation at our Cincinnati estate planning office if you call us at 513-721-1513, and you can use our contact form to send us a message.