An individual retirement account can provide a nest egg to draw from during your golden years. If it turns out that you do not need all or some of the money, the account can be part of your estate plan.
Traditional vs. Roth Individual Retirement Accounts
The two individual retirement accounts that are widely utilized are the Roth account and the traditional IRA, and the difference revolves around taxation. You make pre-tax contributions into a traditional account, and Roth account contributions are made after taxes have been paid.
As a result, when you take withdrawals from a traditional account, they are subject to regular income taxes. You never have to take money out of a Roth account, but if you choose to do so, the distributions are not taxed.
There is an age at which you must take required minimum distributions from a traditional account. It was increased from 70.5 to 72 when the SECURE Act was enacted in December of 2019.
You can take penalty-free distributions from either type of account when you are 59.5 years of age. With a traditional account, this applies to the principal and the earnings, but Roth account holders can withdraw portions of the contributions at any age without being penalized.
If you take assets out of the account prematurely, you must report the income, and there is a 10 percent additional penalty. However, under some circumstances, you can withdraw money from the account before you are 59.5 years old without being penalized.
Rules for IRA Beneficiaries
A spouse that inherits an individual retirement account can retitle it as an inherited account or roll it over into their own account. Non-spouse beneficiaries do not have the rollover option, and they must take mandatory minimum distributions on an annual basis.
Distributions to Roth account beneficiaries are not taxed, but traditional account beneficiaries are required to report the income.
Prior to the enactment of the SECURE Act, there was a very useful strategy that could be implicated called the “stretch IRA.” The beneficiary would take only the minimum that was required by law for the maximum amount of time.
In this manner, the assets would continue to grow in a tax-free or tax-deferred manner. The distribution amount would be based on the life expectancy of the beneficiary. A younger person that inherited a well-funded account would be able to stretch it out for quite some time.
Unfortunately, this strategy can no longer be utilized because of a provision contained within the SECURE Act. Since its enactment, the beneficiaries must take all the money out of the account within 10 years of the time of acquisition.
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We are here to help if you are ready to work with a Burbank, California estate planning attorney to put a plan in place.
Your IRA is one piece of the puzzle, and there are many other considerations. There are different asset transfer vehicles that can be used, and you should implement a nursing home asset protection strategy, because Medicare does not pay for long-term care.
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