If you have an individual retirement account, it may turn out that you do not spend all the money in the account while you are living. A lot of people have questions about the IRA rules for inherited accounts, and we will look at the answers here.
Traditional Account Overview
Before we get into the matter of inherited individual retirement accounts, we will provide an overview of the rules that apply to traditional and Roth accounts. Starting with the traditional IRA, you make contributions into the account before you pay taxes on the income.
This gives you a break until you start taking withdrawals because you pay taxes on less income. However, distributions from the account are subject to regular income taxes.
You can make penalty free withdrawals when you are 59.5, and you are compelled to accept required minimum distributions (RMDs) when you are 72. After you reach the age of 72, you can continue to contribute into the account for as long as you are earning income.
There is a piece of legislation that has cleared the House that is called the Securing a Strong Retirement Act. Informally, it is referred to as SECURE Act 2.0. It has not been approved by the Senate, but it has bipartisan support.
One of the provisions contained in this measure would gradually increase the RMD age to 75, starting with a move up to 73 this year. It would also increase the catch-up contributions for older workers between 62 and 64 years of age from $6500 to $10,000.
Roth Individual Retirement Accounts
The major difference between the two types of accounts is the timing of the taxation. A Roth account is funded with after-tax earnings, so distributions are not taxable. You can take the contributions out of the account without being penalized at any age.
When it comes to the earnings, the 59.5 age applies to Roth account holders as well. If you have this type of account, you are never required to take distributions.
IRA Rules for Beneficiaries
When the original Secure Act was enacted on December 20, 2019, it eliminated a popular estate planning strategy called the “stretch IRA.” Beneficiaries are required to take mandatory distributions. Before this measure was passed, they could take the minimum that was required by law for any length of time.
This would maximize the tax advantages, and Roth account beneficiaries of well-funded accounts were very well served by this strategy because distributions are not taxable.
Unfortunately, this opportunity window was closed when the SECURE Act came along. Now, if you inherit an individual retirement account, you have to close the account within 10 years of the time of acquisition.
Other SECURE Act 2.0 Changes
In closing, we will look at the other significant changes that will be implemented if and when the Securing a Strong Retirement Act is in fact enacted. Under the terms of this measure, employers would be required to automatically enroll their employees into their 401(k) plans.
At the present time, there is a tax credit for lower income people that participate in retirement savings plans. It fluctuates based on income, but a provision in this bill would set it at a flat 50%, and the parameters would be changed to include more people.
Another provision would benefit people that have student loan bills. Many of these folks opt out of 401(k) plans at work because the loan payments leave them with nothing left to save. If this measure passes, employers could choose to provide 401(k) matches of student loan payments.
We Are Here to Help!
Our doors are open if you would like to work with a Burbank, California estate planning lawyer to put a plan in place. Each situation is different, and there is no universal way to proceed. Personalized attention is important, and this is what you will receive when you work with our firm.
You can send us a message if you are ready to set up a consultation appointment, we can be reached by phone at 818-937-2335.