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Home » IRA Inheritance Planning

IRA Inheritance Planning

Most Americans contribute into individual retirement accounts while they are working, and this is one of the cornerstones of many retirement plans. However, over the years, you may do so well that you find that you really don’t need the money that is in the account when you are retired.

Under these circumstances, the account will be inherited by a beneficiary of your choosing after you pass away. With this in mind, you should understand the government regulations that apply to inherited IRAs, and we will cover them in this concise guide.

Roth Individual Retirement Accounts

The Roth account is one of the two most commonly used individual retirement accounts. With this type of account, you pay taxes first before the earnings are contributed into the account. As a result, money that you take out of the account is not considered to be taxable income.

You are allowed to take penalty free withdrawals when you reach the age of 59 ½, and you pay a 10 percent penalty if you extract money before you reach this age. There are however a handful of exceptions, and one of them allows you to take out as much as $10,000 help finance a first home purchase.

If you have unpaid medical bills that you have to cover yourself, you can use money that is in the account to pay them without being penalized. School tuition can also be paid with funds that are in your Roth IRA, and you wouldn’t have to worry about paying an extra charge.

When you have this type of account, you are never required to take withdrawals, and you can continue to put money into the account for an open-ended period of time.

Traditional IRAs

There are some basic similarities with a traditional individual retirement account, but the major difference revolves around the matter of taxation. You make pretax contributions into this type of account, so you get tax breaks along the way.

The IRS starts to get their money when you take distributions from the account, because they are subject to taxation. Because they want to get some money eventually, you are required to take mandatory minimum distributions from a traditional account when you reach the age of 72.

All the other details are identical to the Roth account. The age at which you can take penalty free distributions is the same, and you can continue to contribute into the account indefinitely.

Rules for IRA Beneficiaries

If a spouse is inheriting either type of individual retirement account, they have two choices. The surviving spouse can retitle the account to make it an inherited account and step into the role of the beneficiary, or they can alternatively roll it over into their own IRA.

For non-spouse beneficiaries, mandatory minimum distributions would be required. This income would not be taxable for the beneficiary of a Roth account, but traditional account distributions would be taxed.

The SECURE Act was passed at the end of 2019, and it included a provision that impacted the “stretch IRA” estate planning strategy. Before its enactment, the beneficiary of either type of account could take the minimum distributions for any length of time.

This would maximize the tax benefits, but there is now a 10 year limit. All of the money in an inherited IRA must be distributed within 10 years.

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We are here to help if you are ready to discuss your estate planning goals with a licensed attorney. You can send us a message to request a consultation appointment, and we can be reached by phone at 585-374-5210.

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