IRA Inheritance Planning FAQs

With a traditional individual retirement account, you make contributions before taxes are paid on the income. As a result, you will have less taxable income, and this is one of the near-term benefits.

Once you reach the age of 59.5, you are allowed to take penalty-free withdrawals from the account. Any distributions that you accept from the account would be subject to regular taxes, because there were no taxes paid previously. You are required to take mandatory minimum distributions (MMDs) when you are 70.5 years old.

Contributions are made into a Roth IRA after taxes have been paid on the income. There is the same arrangement in place with regard to your ability to take withdrawals without being penalized when you are 59.5 years of age. If and when you do accept distributions, they would not be subject to taxation.

Plus, you are never required to take mandatory minimum distributions, because the concept exists so that the IRS can eventually start to get some money. Since you already paid your taxes, this is not a factor when you have a Roth individual retirement account.

Yes, there are a few exceptions. You can take as much as $10,000 from your individual retirement account to assist with your first home purchase without being penalized. Penalty-free withdrawals are also allowed to pay medical bills, health insurance premiums, and higher education tuition. These are the most commonly used exceptions, but there are some others.

In a real sense, the situation with regard to taxation on distributions to beneficiaries is the same as it is for the account holder. Someone that inherits a traditional individual retirement account would be required to pay taxes on the income, but this would not be the case when a Roth IRA is inherited.

The answer is yes, the beneficiary of a Roth individual retirement account would be required to take mandatory minimum distributions. It should be noted that the same rule would apply to traditional account inheritors, though this may be self-evident to some people.

There is a concept called the “stretch IRA.” The idea is for the beneficiary to take only the minimum that is required by law each year to extend the viability of the account.

Clearly, this is a more effective strategy when it is used in conjunction with a Roth IRA since there are no taxes to pay on the distributions. Plus, you would never be required to take distributions while you are alive.

With the traditional variety, the MMDs that the original account holder would be compelled to accept would continually reduce the value of the IRA before it is transferred to the beneficiary.