Individual retirement accounts are commonly used by Americans throughout their working careers as they are building nest eggs that they can draw from during their golden years.
If you are particularly successful, you may recognize the fact that you will never have to use the money in your account. At that point, it can be part of your estate plan. The same thing is true for some folks that know all along with they are not going to rely on any of those funds during their retirement years.
We are going to share some things that everyone should know about individual retirement accounts and estate planning. But first, let’s look at the differences between traditional IRAs and Roth individual retirement accounts.
The major difference these types of accounts can be boiled down to the matter of taxation. If you have a traditional account, you make contributions into it before you pay taxes on the income. It works in the reverse manner if you have a Roth individual retirement account.
You can withdraw money from either type of account without being penalized when you are 59 ½ years old, but there are a few exceptions to the rule.
An account holder can take up to $10,000 out of an IRA to help finance a first home purchase. Assets in the account can also be utilized to cover unpaid medical bills and school tuition.
Required minimum distributions must be accepted by traditional account holders when they are 72 years of age. The age used to be 70 ½, but it was increased when the SECURE Act was enacted in December of 2019.
This requirement exists because the IRS wants to start getting its tax money before you pass away. If you have a Roth account, you never have to take distributions, because you already paid taxes on the contributions.
With both types of accounts, you can contribute on an open-ended basis. Before the SECURE Act was passed, traditional account holders had to stop putting money into the account when they reached the required minimum distribution age.
Rules for IRA Beneficiaries
Now that we have provided the requisite background information, we can get to the point of this post. If a spouse inherits an individual retirement account, they have a couple of options.
They can retitle the account to an inherited account and assume the role the beneficiary. A spouse would also be able to roll the inherited account into their own IRA.
For non-spouse IRA beneficiaries, there is just one path that must be followed. They have to take mandatory minimum distributions. For a traditional beneficiary, they are taxable, and Roth individual retirement account beneficiaries do not have to report the income.
Before the SECURE Act was enacted, there was an estate planning technique that was recommended called “stretching the IRA.” Beneficiaries were advised to take only the minimum that is required by law for as long as possible to maximize the tax advantages.
This was especially lucrative for Roth account beneficiaries, and wealthy families would often use this approach quite intentionally. Now, the beneficiaries of both types of accounts have 10 years to completely clear out all assets that are in their inherited IRAs.
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