If you take the right steps in advance to feather your nest, you can put your working years behind you at some point and enjoy your golden years to the fullest. For many people, an individual retirement account will be part of the plan.
This will provide an underpinning that you can draw from when you are a senior citizen, but what happens if you don’t need the money? At some point, you may recognize that you will be in this position.
The account will then be part of your estate plan. With this in mind, we will pass along some key facts about IRAs and estate planning in this post.
Traditional and Roth Individual Retirement Accounts
Though there are some variations, the two types of individual retirement accounts that are most commonly utilized are the traditional account and the Roth IRA. The major difference between these two types of accounts is the way that they are taxed.
When you have a traditional individual retirement account, the money that goes into the account comes out of your paycheck before taxes are paid. As a result, you earn less taxable income each year while you are contributing into the account, and this gives you a break in the near term.
With a Roth IRA, the taxation works in the reverse manner. After-tax income goes into the account, so you and the IRS are always up-to-date with one another.
Penalty-Free Distributions
You can begin taking distributions without being penalized when you are 59 ½ years of age, and this applies to both types of accounts, but there are a few exceptions to the rule.
If you are buying your first house, you can take up to $10,000 out of your individual retirement account to help finance the purchase, and you would not be penalized. Withdrawals that are used to pay college tuition or unpaid medical bills are exempt from penalties as well.
Taxes on Distributions
Since taxes have already been paid, Roth account holders do not have to report withdrawals as income. Since traditional accounts are based on pretax funding, those distributions are subject to taxation.
Required Minimum Distributions
The IRS wants to start getting some money eventually, so traditional account holders are forced to take mandatory minimum distributions when they are 72 years old. Roth account holders already paid taxes, so they never have to take money out of their accounts.
No Age Limit for Deposits
Regardless of the type of account that you have, you can continue to contribute into it for an open-ended period of time. Prior to the enactment of the SECURE Act at the end of 2019, traditional account holders had to stop contributing when they reached the mandatory minimum distribution age.
IRA Rules for Beneficiaries
Non-spouse beneficiaries are required to take mandatory distributions annually. The same tax arrangement is the same as it is for the original account holder: Roth beneficiaries receive the payouts tax-free, and traditional beneficiaries have to claim the income.
All money must be cleared out of the account within 10 years of the transfer of ownership. This is a new rule that was installed when the SECURE Act was passed, and it put a damper on a widely utilized estate planning strategy.
Beneficiaries used to stretch out the individual retirement accounts for as long as possible to maximize the tax benefits.
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Our doors are open if you would like to discuss your estate planning goals with a licensed attorney. You can send us a message to request a consultation appointment, and we can be reached by phone at 219-865-2285.
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