An individual retirement account can provide an underpinning during your senior years. However, if it turns out that you that you don’t need the money, your IRA will be part of your estate plan. And of course, you may intentionally use the account for estate planning purposes.
There are a lot of questions being asked about these accounts from an inheritance planning perspective, because a new law has changed the playing field. We will look at the current state of affairs in this post.
Traditional vs. Roth Individual Retirement Accounts
The two types of accounts that are most commonly utilized are the traditional account and the Roth individual retirement account. With a traditional IRA, you contribute into the account with pretax earnings, so you pay taxes on less income.
On the flip side of that equation, when you take distributions from the account, you have to claim the income on your regular tax returns. You are required to take mandatory minimum distributions when you reach a certain age, and we will get to that later.
Contributions into a Roth individual retirement account are made after taxes have been paid on the income, so withdrawals are not subject to taxation. You never have to take money out of a Roth account.
Why isn’t a Roth account holder required to take distributions?
Distributions are required for traditional account holders because the IRS wants to start getting some tax money at some point. Since the Roth accounts are funded with after-tax earnings, the tax man has already been satiated.
You can start to take money out of either type of account without being penalized when you are 59 ½ years old. An account holder can also extract up to $10,000 to help finance a first home purchase, and penalty free withdrawals are allowed to pay medical bills and school tuition.
SECURE Act
In December of 2019, the SECURE Act was passed by Congress and signed into law by the president. It changed some of the individual retirement account parameters.
Before the enactment of this law, the age at which traditional account holders had to start taking distributions was 70 ½, and it has now been raised to 72.
Another change gives you the ability to contribute into a traditional IRA for any length of time. There was a cutoff age of 70 ½ prior to 2020. Roth account holders have always been able to contribute indefinitely, so the status quo has been retained.
IRA Beneficiaries
A non-spouse beneficiary of either type of account would be compelled to accept required minimum distributions annually. Roth IRA beneficiaries would not pay taxes on these distributions, but they would be taxable for traditional beneficiaries.
There is one other major change that has had a significant impact on the utilization of individual retirement accounts for estate planning purposes.
In the past, a beneficiary could take only the minimum that is required for any length of time. This was called “stretching an IRA,” and it was a very effective inheritance planning strategy that was especially useful for Roth beneficiaries.
Now, all of the assets must be cleared out of either type of account within 10 years.
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Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021, 2022 and 2023.
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