If you have an IRA, you may need to access the funds yourself, but this is not always the case. In this post, we will explain how individual retirement accounts can be effective asset transfers vehicle in an estate planning context.
Traditional Individual Retirement Accounts
There are some variations, but for the most part, there are two different types of individual retirement accounts that are typically utilized: traditional accounts, and Roth IRAs. In many ways, they are the same, but there are a couple of profound differences.
When you have a traditional individual retirement account, you make the contributions into it before you pay taxes on the income. Generally speaking, you cannot access assets in the account until you are 59 ½ years old, but there are a handful of exceptions.
You can potentially obtain permission to receive a penalty free withdrawal for medical expenses or school tuition. Money from the account can also be used to help with the purchase of the first home, with a limit of $10,000.
Once you reach the age of 59 ½, you have unfettered access, but you have to pay regular income taxes on distributions that you take from the account. This is because of the fact that you were able to deposit the money with pre-tax income.
Another consequence that goes along with the deferred taxation is the requirement to take mandatory minimum distributions when you are 70 ½ years of age. Bluntly put, the IRS wants to start to get its cut at some point.
If never need money that is in the account (or at least not all of it), the beneficiary that you name would assume ownership of it after your passing. The beneficiary would be required to accept mandatory minimum distributions, and they would be taxable.
However, a beneficiary could take only the minimum that is required to allow the assets in the account to generate earnings in a tax-deferred manner for as long as possible.
With a Roth individual retirement account, contributions are made after taxes are paid on the income. The age at which you can begin to take penalty free withdrawals is the same, but you are never required to take them. This is because you have already paid taxes on the income, and if you do take money out of the account, there would be no taxation.
This type of account can facilitate very tax efficient asset transfers to the beneficiary. When the account is transferred as part of your estate, the beneficiary would be required to take mandatory minimum distributions if it is anyone other than your spouse. These transfers would not be subject to regular income taxes.
A beneficiary can choose to “stretch the IRA” by accepting only the minimum that is required, and the advantage is maximized because of the tax-free distributions.
Learn More About IRAs and Estate Planning
We have provided a brief, succinct overview here, but there is a fantastic resource that you can access through this website if you would like to learn more. Our firm has produced an in-depth special report on the estate planning benefits of individual retirement accounts. This report will explain everything you need to know, and it is being offered free of charge.
In addition to this particular report, we actually have a library of special reports that cover many different important estate planning and elder law topics. To access the IRA report or any of the others, visit the page that is devoted to our special reports and follow the simple instructions.
We Are Here to Help!
Absorbing written information is great, but there is no substitute for a real-time consultation with a licensed estate planning attorney. We would be glad to sit down with you, gain an understanding of your goals, your financial situation, and your family dynamic and advise you accordingly.
You can schedule a consultation appointment right now if you call us at 513-721-1513, and you can alternately send us a message if you would prefer to reach out electronically.