If you are like most people that take retirement planning seriously, you are contributing into an individual retirement account. The idea is to be able to draw from these resources when you put your working years behind you, but what if you do not need the money?
Under these circumstances, your account could be part of your estate plan. The exact details will vary depending on the type of account that it is, and there are two of them that are widely utilized.
One of these is the traditional individual retirement account, and the other one is the Roth IRA. The major difference between these two accounts is the way that taxes are paid.
Contributions into a traditional account are pretax contributions, so withdrawals are subject to regular income taxes. The Roth variety works in the opposite manner. You put money into the account after taxes have been paid, and as a result, distributions are not subject to taxation.
Now that we have shared the basics, we can move on to look at five important facts that you should know about these accounts.
Penalty-Free Distribution Age
The idea is for these accounts to be used when you attain senior citizen status. As a result, you are penalized if you withdraw money from your individual retirement account before you are 59.5 years of age.
There are a few exceptions to this rule. You can take money out of the account to pay medical bills or school tuition, and you can withdraw up to $10,000 to help finance a first home purchase.
Required Minimum Distributions
Since the Internal Revenue Service wants to get some money before you pass away, there is a minimum distribution requirement for traditional account holders. You have to start receiving these distributions when you are 72 years old.
Distributions are never not required when you have a Roth account, because you pay taxes on the income before you put some of the remainder into the account.
At the end of 2019, the SECURE Act was enacted. It changed some of the individual retirement account parameters. We stated above that the required minimum distribution age for a traditional account is 72; it used to be 70.5 before this legislative measure was passed.
Another change allows a traditional account holder to continue to contribute into the account indefinitely. This was always the case with Roth accounts. However, before the SECURE Act, traditional account holders had to stop contributing when they reached the mandatory distribution age.
SECURE Act 2.0
Another individual retirement account reform bill is making its way through the legislative process, and it is being informally called SECURE Act 2.0. It would increase the required distribution age for traditional account holders to 75 over a number of years.
Employers would be required to enroll all eligible employees into their 401(k) plans, and employees would have the ability to opt out. Another change would allow employers to provide retirement account matches of student loan payments that are made by their employees.
Rules for IRA Beneficiaries
Since we are ultimately looking at IRA inheritance planning, we have saved the most significant part for last. If you leave either type of individual retirement account to your spouse, they could either roll it over into their own account or title it as an inherited account and assume the beneficiary role.
For non-spouse beneficiaries, the inheritor would be required to take minimum distributions for both types of accounts. They would be taxable for traditional beneficiaries, and Roth IRA beneficiaries would not pay taxes on the income.
Another change that came about due to the SECURE Act is not a good one from an estate planning perspective. Before it was enacted, an individual retirement account beneficiary could stretch the distributions out for any period of time to maximize the tax benefits.
This was especially useful for Roth account beneficiaries. Now, all of the resources must be cleared out of the account within 10 years.
Schedule a Consultation Today!
We are here to help if you are ready to work with a Burlington, VT estate planning lawyer to put a plan in place. You can call us at 802-879-7133 to schedule a consultation appointment, and you can use our contact form if you would rather send us a message.