Retirement planning, elder law, and estate planning are all tied together, so we advise clients that have questions about every aspect of the process. One matter that we often address is the potential estate planning value of individual retirement accounts. We will look at the details in this post.
Traditional vs. Roth IRAs
The two types of individual retirement accounts that are most often used are the traditional variety and the Roth IRA. With a traditional account, you make the contributions before you pay taxes on the earnings. As a result, your taxable income each pay period will be lower than it would be if you did not have the account, so you save on taxes in the near term.
You are not allowed to withdraw assets from the account without incurring any penalties until you are 59.5 years of age. This being stated, there are a few exceptions to this rule.
The guidelines allow for a withdrawal to help fund your first home purchase, and you can take money out of the account to pay medical bills that are not going to be paid by insurance. Penalty free withdrawals are permitted to pay for school tuition as well.
Since the deposits were made with pre-tax income, when you take money out of the account, the distributions are looked upon as regular income by the Internal Revenue Service.
From an estate planning perspective, you cannot let the funds continue to accumulate until you pass away unless you die before you are 70.5 years old. The IRS wants to get some money eventually, so you are compelled to begin to take mandatory minimum distributions when you reach this age.
Once you have in fact passed away and your beneficiary assumes ownership of the account, the beneficiary would be required to take mandatory distributions, and they would be taxable. However, they could take only the minimum that is required annually to maximize the tax deferral advantage.
With a Roth IRA, the age at which you can begin to take distributions without being penalized is the same, and the exceptions are consistent as well. You are never required to withdraw assets from a Roth individual retirement account, because the taxes have been paid.
For this reason, the Roth IRA is ideal for estate planning purposes. If you name a beneficiary that is anyone other than your spouse, this person would have to take mandatory minimum distributions, but they would not be subject to taxation.
It is even more beneficial to stretch a Roth individual retirement account out as long as possible, because the assets continue to grow for the maximum length of time, and the distributions are not taxed.
Learn More About IRAs and Estate Planning
We have shared some basic information in this post. Now, if you are ready to take the next step and learn everything that you need to know about individual retirement accounts and estate planning, check out our free report. It is free and simple to access, and you can click the following link to get to the page: Free IRA Report.
Schedule a Consultation Right Now!
Since you are on this website, you must be interested in estate planning, and you are certainly in the right place. The written materials here are very beneficial, but there is no substitute for a direct, one-on-one consultation with a licensed attorney.
We would be more than glad to gain an understanding of your objectives and your family dynamic, explain your options to you, and help you put the ideal plan in place to preserve your legacy. You can call us right now at 513-721-1513 to schedule a consultation, and you also have the option of sending us a message through the contact form on this website.