Many people contribute into individual retirement accounts with an eye on their golden years. This is a smart move, but if you are enjoying a good bit of financial success, you may never need to tap into the account.
When you come to that realization, you can look at your account as part of your estate plan. With this in mind, we will explain the guidelines that are in place for IRA beneficiaries in this post.
But first, let’s take a look at these accounts from an overview.
Individual Retirement Accounts
You fund a traditional individual retirement account with earnings before you pay taxes on them. This is great in the near term, because your taxable income is lower, and this will reduce your responsibility each year.
When you reach the age of 59 ½, you are free to take withdrawals without being penalized. You do have to pay taxes when you take money out of the account, and you are required to accept minimum distributions when you reach the age of 72.
This age was increased to 72 from 70 ½ when the SECURE Act was enacted at the end of 2019. Another change gave a traditional account holder the freedom to continue contributing into the account for an open-ended period of time.
In the past, contributions had to stop when the account holder reached the required minimum distribution age.
Roth IRAs
The major difference between Roth individual retirement accounts and traditional IRAs is the tax sequence. If you have a Roth account, you make contributions after you pay taxes on the income, so distributions are not taxable.
You never have to take required minimum distributions when you have this type of account, but the other details mirror the traditional guidelines.
Rules for Individual Retirement Account Beneficiaries
Now we can drill down to the inheritance planning implications. When a spouse inherits an IRA, they can retitle it and become the beneficiary or roll it over into their own account.
The situation is different for beneficiaries that hold any other relationship to the original account holder. Whether it is a Roth account or a traditional account, the beneficiary would be required to take mandatory distributions on an annual basis.
As you might imagine, distributions to a Roth account beneficiary are not taxable, but traditional beneficiaries would have to report the payouts on their tax returns.
Before the SECURE Act changed the playing field, there was a widely utilized estate planning strategy called the “stretch IRA.” The beneficiary would accept only the minimum that was required by law for as long as possible.
This would be particularly advantageous for beneficiaries of Roth accounts that were very well-funded. Now, all of the assets in the account must be accepted by the beneficiary within 10 years, so the leeway for stretching is limited.
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Our firm has prepared an estate planning worksheet that you can go through to gain a better understanding of the estate planning process in multiple ways. It is being offered free of charge, so you have some very useful knowledge to gain and nothing to lose.
To get your copy, visit our worksheet access page and follow the simple instructions.
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If you would like to schedule a consultation appointment, we can be reached by phone at 310-337-7696. There is also a contact form on this website you can use if you would rather send us a message to set the wheels in motion.
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