When you are planning ahead for the future, you should account for every phase of your life. You want to make sure that you are financially comfortable during your active retirement years, and you should also consider the twilight years that will follow.
Ideally, you will have a suitable financial legacy to leave behind to your loved ones after you pass away.
Retirement can be partially funded by an individual retirement account. There are two different types of individual retirement accounts that are widely utilized: traditional individual retirement accounts, and Roth IRAs. Let’s look at the differences between these two accounts.
Traditional IRAs
When you have a traditional individual retirement account, the contributions are made before you pay taxes on the income. As a result, you are saving money while you are lowering your taxable income, so there is a dual positive.
You cannot make penalty-free withdrawals from the account until you are 59.5 years old. It would be possible to extract money from the account early, but you are penalized unless the withdrawals are for certain approved purposes. These would include the purchase of your first home, educational expenses, health insurance for the unemployed, and medical expenses.
When you reach the age of 59.5, you can begin to take withdrawals as you see fit without any penalties being imposed. These withdrawals would be subject to regular income taxes, because you did not pay taxes in the beginning.
With a traditional individual retirement account you are required to begin taking mandatory minimum withdrawals when you reach the age of 70.5. Because you must take mandatory minimum withdrawals, these accounts have limited value from an estate planning perspective.
Roth IRAs
The rules governing Roth IRAs are similar in some ways, but they are significantly different in others. When you have a Roth IRA, you make contributions after you pay taxes on the income. Because you have already paid taxes, withdrawals that you make would not be taxable.
You can start taking penalty-free withdrawals when you are 59.5 years of age. However, you are not required to take mandatory minimum withdrawals. As a result, you could use a Roth IRA as part of your estate plan.
If the beneficiary is someone other than your spouse, he or she would be required to take mandatory minimum withdrawals. These withdrawals would be based on the beneficiary’s life expectancy. A younger beneficiary would be required to take less than an older one.
The beneficiary could “stretch” the individual retirement account, and take only the minimum that is required. This would maximize the tax-free growth.
Learn More About Individual Retirement Accounts
We have prepared an in-depth report on the value of individual retirement accounts. To access your copy of this free report, click this link and follow the simple instructions: Free IRA Report.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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