Retirement planning is inherently related to estate planning, because you may pass away while you are in possession of assets that were earmarked for your retirement years. In fact, this does not have to be a random occurrence; you could proactively plan your estate with the transition in mind.
Individual Retirement Accounts
Individual retirement accounts will often be part of the retirement/estate planning equation. There are some variations, but generally speaking, there are two different types of IRAs: traditional individual retirement accounts, and Roth accounts. They are similar, but there is a very important difference.
When you have a traditional individual retirement account, contributions are made before you pay taxes on the income. In the near term, this is a tax advantage, but the IRS gets its share by taxing the distributions. The situation is reversed with a Roth IRA. Contributions are made after taxes have been paid, so there is no taxation on distributions.
An account holder can begin to take penalty free withdrawals from either type of account when they reach 59 ½ years of age. There are some very limited exceptions to this rule, and we will cover them in a different blog post.
Since contributions into a traditional individual retirement account have never been taxed, the government wants to start to get its share at some point in time. As a result, if you have this type of account, you are required to start to take mandatory minimum distributions eventually.
Up until the end of 2019, account holders were required to start to accept mandatory minimum distributions when they were 70½ years old. This changed when the SECURE Act became the law of the land on December 20, 2019. One provision contained within this piece of legislation raised the required mandatory minimum distribution age to 72.
There is no point at which mandatory minimum distributions are required for primary Roth individual retirement account holders.
Retirement Account Beneficiaries
When the beneficiary of either type of IRA is someone other than the spouse of the account holder, this individual would be required to accept mandatory minimum distributions. However, distributions to a Roth beneficiary would not be subject to regular income taxes. A beneficiary of a traditional account would have to pay taxes on the income.
Prior to the enactment of the SECURE Act, beneficiaries could employ something called a “stretch IRA” strategy. They were required to take minimum distributions, but the amount could be spread out across the anticipated lifetime of the beneficiaries. This would allow for the maximization of the tax benefits that these accounts provide.
The new law has changed the playing field. Beneficiaries must take the entirety of the remainder that is left in the account within 10 years of the death of the original account holder. It should be noted that they do not necessarily have to accept distributions incrementally over the 10 year period. A beneficiary would have the ability to take everything that is in the account in one lump sum on the day before the interim expires if they choose to do so.
Attend a Free Seminar
Our attorneys are conducting a series of free seminars in the near future, and we urge you to attend the session that fits into your schedule. To see all the details, visit our seminar page and click on the session that interests you.
We Are Here to Help!
If you are ready to get down to business, we would be more than glad to help you put a custom crafted estate plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 513-721-1513.