IRA Inheritance Planning

Aside from Social Security, individual retirementaccounts (IRAs) are at the core of many long-term financial plans. If you arein an especially good position during your golden years, you may never have touse the money in your IRA. In these cases, your account may be part of yourinheritance plan.

Traditional Individual Retirement Accounts

The traditional IRA is one of the two most commonlyused types of retirement accounts. You deposit money into a traditional accountbefore you pay taxes on the income. In the near term, you get a tax break,because you are claiming less income each year.

On the other side of the coin, you do have to paytaxes on distributions that you take from the account. You can start takingmoney out of the account without any penalties when you are 59.5 years of age.This being stated, there are a handful of exceptions to this rule.

Younger account holders are allowed to take up to$10,000 out of the account for a first home purchase. You can use money in theaccount to pay for school tuition, and there is no penalty if you use the fundsto pay unpaid medical bills.

From an inheritance planning perspective, this type ofaccount is less than ideal. You have to take required minimum distributionseach year when you reach the age of 72. The age used to be 70.5, but it wasraised when the SECURE Act was enacted in 2019.

Another change that was implemented when this piece oflegislation was passed is positive if you would like to use the account forestate planning purposes. You are now allowed to contribute money into theaccount for an open-ended period of time.

Before the SECURE Act was passed, when you reached themandatory minimum distribution age, you could no longer contribute into theaccount.

Roth IRAs

The other widely utilized individual retirementaccount is the Roth variety. With this type of account, the tax situation isreversed. You put money into the account after you have paid taxes on yourincome, and as a result, you pay no taxes when and if you take distributions.

We are using the word “if” because you are neverrequired to take mandatory minimum distributions from a Roth individualretirement account. The minimum age for penalty-free distributions is 59.5 forthese accounts as well.

Individual Retirement Account Beneficiaries

When you establish an individual retirement account,you name a beneficiary. If the beneficiary is your spouse, they could choose tobecome the owner of the account. The survivor would also have the option ofrolling it over into another account.

A non-spouse beneficiary would not be able to becomethe owner. They would be required to take mandatory minimum distributions, andthe payouts would be taxed. Due to a provision in the SECURE Act, thebeneficiary would be required to clear out the account within 10 years.

This is a very negative development on the estateplanning front. It used to be possible to stretch out the account indefinitelyto maximize the tax deferral benefit.

The change is even more damaging for Roth individualretirement account beneficiaries. They also have to take required minimumdistributions, but they are not taxed. The stretch Roth IRA was a commonly usedestate planning approach for wealthy people with very well-funded accounts.

Let’s Talk!

Though the stretch IRA is not what it used to be, yourindividual retirement account can potentially be a very useful part of yourinheritance plan. If you are currently unprepared, or if your existing estateplan does not reflect your current situation, action is required.

There are a lot of different ways to plan an estate,and the right choices will depend on the circumstances. We can gain anunderstanding of your estate planning goals, explain your options to you, andhelp you put the ideal estate plan in place if you decide to go forward.

To set the wheels in motion, give us a call at 212-973-0100 . If you would rather get in touch through the Internet, fill out our contact form and you will get a quick response.