Many people contribute into individual retirement accounts or IRAs, and the primary purpose for most people is the development of a retirement nest egg. An IRA can indeed be an essential part of your retirement plan, but under some circumstances, an IRA could be used for estate planning purposes.
Let’s look at the details.
Roth Individual Retirement Accounts
One type of individual retirement account is the Roth IRA. With this type of account, you make contributions after you pay taxes on the income. As a result, if and when you take distributions, they are not subject to taxation. You can begin to take penalty-free withdrawals when you are as young as 59.5 years of age.
You are not required to take mandatory minimum withdrawals at any time when you have a Roth IRA. As a result, if you are in a financial position to do so, you could allow the account to grow tax-free throughout your life, and you could bequeath the account to a beneficiary.
If the beneficiary is someone other than your spouse, mandatory minimum distributions would be required. However, the beneficiary could maximize the tax advantages by taking only the minimum amount that is required by law. Plus, the distributions to the beneficiary would not be taxed, and this is another estate planning advantage.
Traditional Individual Retirement Accounts
Traditional individual retirement accounts work in the opposite manner when it comes to income taxes. You contribute into a traditional IRA with pretax earnings. Once you begin to take distributions, they are subject to regular income taxes.
Since you did not pay taxes on the original contributions into the account, the tax man wants to get something eventually, so you are required to take mandatory minimum distributions when you are 70.5 years old.
You can allow for a beneficiary to assume ownership of anything that may be left in the account after you pass away. This is a positive, but the estate planning benefits are minimized, because you have to remove assets from the account along the way.
The beneficiary could ultimately take only the minimum that is allowable by law to maximize the tax deferred growth, but the distributions would be subject to taxation.
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We have just scratched the surface with regard to the estate planning benefits of individual retirement accounts in this blog post. If you would like to learn more, we invite you to download our comprehensive special report.
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