You may come to the realization that your individual retirement account will be passed along as part of your estate plan, and this will raise questions. We will provide answers in this post, and we will start with a general explanation of the guidelines for account holders.
Traditional Individual Retirement Accounts
Your taxable income is reduced by the amount of the contributions that you make into a traditional individual retirement account. This is advantageous in the near term, but distributions from the account are taxable.
The idea behind this arrangement is the notion that you will be in a lower tax bracket during your retirement years when you start taking distributions.
This being stated, you do not necessarily have to wait until you are no longer working to take money out of the account. You can accept penalty-free distributions when you are as young as 59.5 years old, and there is a 10 percent penalty for early withdrawals.
With regard to the penalty, there are some exceptions to the rule. Money can be withdrawn to pay for higher education tuition, and you can take distributions to pay health insurance premiums if you are unemployed.
There is no penalty if you withdraw funds to cover unpaid medical bills, and you can extract as much as $10,000 to help you make a first home purchase.
Because the IRS wants to start getting some money eventually, traditional account holders must take required minimum distributions (RMDs) when they are 73 years of age. This is a new development that came about as a result of the SECURE Act 2.0 provisions contained in the recently passed Omnibus Bill. It will top out at 75 in 2033.
A provision in the original SECURE Act gives a traditional account holder the ability to contribute into the account for an open-ended period of time. Prior to its enactment, the contributions had to stop when the account holder reached the age at which distributions were required.
The other type of individual retirement account that is most commonly used is the Roth IRA. Contributions into a Roth individual retirement account are made after taxes have been paid, so distributions are not subject to further taxation.
Since the IRS has been satisfied, there are no required minimum distributions. This presents an ideal inheritance planning opportunity if you never need the money.
There are no differences with regard to the penalty free distribution age for the earnings, the exceptions, or the freedom to continue to make distributions regardless of your age. However, a Roth account holder can withdraw portions of the princial at any age without penalty.
Rules for Beneficiaries
When a spouse is inheriting an individual retirement account, they can roll it over into their own account, or they can become the beneficiary of an inherited account.
A non-spouse beneficiary will retitle the inherited account, and they would be compelled to take required minimum distributions on an annual basis. These distributions would be taxed if it is a traditional account, and distributions to beneficiaries of Roth accounts are not taxable.
Before the enactment of the SECURE Act, estate planning attorneys used to recommend the “stretch IRA” strategy. The beneficiaries would take minimum distributions for as long as they possibly could to prolong the tax benefits. This was particularly effective for beneficiaries of well-funded Roth accounts.
A provision contained within the first SECURE Act that was enacted in 2019 puts an end to the stretch IRA. Beneficiaries must now clear out and close the accounts within 10 years, so the open-ended stretch is a thing of the past
Need Help Now?
There is no time like the present if you already know that you should work with an attorney to put an estate plan in place. You can send us a message to request a consultation appointment at our Burbank, CA estate planning office, and we can be reached by phone at 818-937-2335.