As estate planning and elder law attorneys, we emphasize the holistic nature of the process. The first step is to prepare yourself for a comfortable retirement, and you should simultaneously consider the twilight years that will follow. Ultimately, you should be in a position to pass along a meaningful legacy to your loved ones.
Your retirement plan will naturally blend into your estate plan, and this is something that we can help you understand. For many people, individual retirement accounts are part of this equation, and you should have a thorough understanding of the guidelines when you are making preparations for the future.
Though there are some variations, there are two different types of individual retirement accounts that are most commonly used: traditional IRAs, and Roth IRAs. With both types of accounts, you can start to take penalty-free distributions for any reason when you are 59.5 years of age.
You make contributions into a traditional individual retirement account before you pay taxes on the income. As a result, when you take distributions, they are subject to regular income taxes.
We use the word “when” because you are required to accept mandatory minimum distributions when you are 72 years old.
Roth IRA contributions are made after taxes are paid. Because of this, withdrawals are not taxable, and you are never required to take distributions.
The tax rules are the same for beneficiaries. There are no taxes on distributions to beneficiaries of Roth IRAs, but distributions to beneficiaries of traditional individual retirement accounts must pay taxes on the income.
SECURE Act Changes
At the end of 2019, a piece of legislation called the SECURE Act was formally enacted, and it is now the law of the land. This measure changed some of the individual retirement account parameters, and they are significant from an estate planning perspective.
The age at which traditional IRA mandatory minimum distributions are required was raised from 70.5 to 72. You are now allowed to continue to contribute into a traditional individual retirement account for the entirety of your life if you choose to do so.
Before the enactment of this law, you would lose your ability to make contributions when you were 70.5 years old. It should be noted that there was never any age ceiling for ongoing Roth account contributions, and nothing has changed in this regard.
From an estate planning perspective, the huge difference is the elimination of the ability to implement the “stretch IRA” strategy. In the past, if you were to leave either type of IRA to a beneficiary that is not your spouse, the beneficiary would be required to take mandatory minimum distributions.
However, they could be spread out on an open-ended basis. The beneficiary could take only the minimum that is required, and the tax advantages could be realized for the maximum amount of time.
Now, mandatory minimum distributions are not required, but the beneficiary must accept all of the money in the account within 10 years. This stipulation condenses the tax responsibility for traditional account beneficiaries. It also limits the ability for beneficiaries of both types of accounts to take advantage of the tax-free or tax-deferred growth.
Schedule a Consultation Today!
We are here to help if you would like to alter your existing plan to address the impact of the SECURE Act. And of course, we would be more than glad to discuss any other estate planning matter with you in person. You can send us a message to request a consultation appointment, and we can be reached by phone at (585) 546-1734.