Estate planning and retirement planning go hand-in-hand in a way, because one thing leads to another. Individual retirement accounts are part of this equation, and at the end of 2019, a piece of legislation was enacted that changed the rules governing these accounts in some significant ways.
Before we look at the updates, we should provide some background information about individual retirement accounts in general.
Individual Retirement Accounts
There are essentially two different varieties: traditional IRA’s, and Roth individual retirement accounts. The major difference between the two is the tax factor.
If you establish a traditional individual retirement account, you would make contributions into the account before you pay taxes on the income. This would reduce your taxable income as you are contributing into the account, but on the other side of the coin, distributions from the account would be taxed.
The situation is reversed with a Roth IRA. You make deposits into the account after you pay taxes on the income, but if and when you take distributions, you do not have to report them as taxable income. We included the word “if” because you are never required to take distributions from a Roth individual retirement account.
Under the regulations, an account holder can begin to take penalty-free distributions at the age of 59 ½ with either type of account. It should be noted that there are some limited exceptions to this rule that allow for earlier distributions that are not subject penalization.
Mandatory minimum distributions are required for traditional IRA holders when they reach a certain age. This stipulation is in place because the taxation has been deferred, and the Internal Revenue Service wants to start getting its share at some point.
Distributions to a beneficiary after the passing of a traditional account holder would be taxed, and they would be tax-free when a Roth individual retirement account is passed down. Beneficiaries of both types of accounts (with the exception of spouses) would be required to take mandatory minimum distributions.
SECURE Act Changes
Before the SECURE Act passed in December, traditional individual retirement account holders had to start taking mandatory minimum distributions when they were 70 ½ years old. One of the most significant elements of the updated legislation was an increase in this age to 72.
From an estate planning perspective, this is a major positive. You can let the account sit untouched for a longer period of time if you do not need the money.
There is another change that negatively impacts the utilization of individual retirement accounts for estate planning purposes. Under the old parameters, a beneficiary could “stretch” the individual retirement account by taking only the minimum that is required by law throughout their life. This would be a way to take maximum advantage of the tax benefits.
Now, with a few exceptions, all of the assets must be cleared out of the account within 10 years of the death of the original account holder. This is the case for both types of individual retirement accounts.
Attend a Free Workshop!
As you can see, there are a lot of nuances that can enter the picture when you are planning your estate. It’s hard to stay on top of them as a layperson, and this is fully understandable.
This is why we make an effort to get out into the community to provide educational opportunities. Our attorneys are conducting a number of workshops over the coming weeks, and you can learn a great deal if you attend one of these sessions.
There is no admission charge, but we ask that you register in advance, because space is limited. We get a lot of excellent feedback from attendees, so we urge you to attend the session that fits into your schedule.
You can see all the dates if you visit our workshop page. After you determine which session you would like to attend, click on the registration link and follow the simple instructions to reserve your seat.
If you have any questions, or if you would like to schedule a direct, one-on-one consultation, we can be reached by phone at (585) 546-1734.