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When you establish the account, you name a beneficiary that would become the account owner after you pass away.
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The answer to this question depends on the type of account that you are leaving to a beneficiary. If you have a traditional individual retirement account, you make contributions before you pay taxes on the income.
This is positive in the near term, because you pay taxes on less income each year. On the flip side, since you made pretax contributions, distributions that you take would be subject to taxation. The same arrangement would apply to the beneficiary of the account.
On the other hand, if you have a Roth individual retirement account, contributions are made after taxes have been paid. You would not be taxed if you take money out of the account, and the beneficiary would not have to report distributions when they file their income tax returns.
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Once again, the answer to this question is different for each respective type of account. You never have to take distributions from a Roth individual retirement account, because the IRS has already gotten their share.
Mandatory minimum distributions (RMDs) are required if you have a traditional account because the tax man want to start getting some money eventually. Prior to the enactment of the SECURE Act, the age at which you had to take RMDS was 70.5, but it is now 72.
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For either type of account, you can take penalty-free distributions when you are 59.5 years of age.
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Yes, there are a few exceptions. You can take as much as $10,000 out of the account to help to finance your first home purchase. Penalty free distributions can also be taken to cover unpaid medical bills and school tuition.
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There was another change that was included in the SECURE Act that applies to this question. In the past, you had to stop contributing into a traditional account when you reached the mandatory distribution age. Now, you can contribute into the account indefinitely.
Roth IRA account holders have always been able to contribute into their accounts for open-ended periods of time.
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Non-spouse beneficiaries have to take required minimum distributions on an annual basis. Before the SECURE Act was passed, estate planning attorneys used to recommend a strategy called the “stretch IRA.”
The idea was to take only the minimum that was required by law to maximize the tax-free growth. This strategy was especially useful for Roth individual retirement account beneficiaries because of the fact that the distributions are not subject to regular income taxes.
This new law has eliminated the long-term stretch IRA. As it now stands, the beneficiary must take all of the assets out of the account within 10 years.
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