IRA Inheritance Planning: What Are the Rules for Beneficiaries?
When you are contributing into your 401(k) plan or another type of individual retirement plan, you are developing a nest egg to draw from during your senior years. As time goes on, you may find that you will not be exhausting the account during your lifetime.
At that point, you have to look at your savings from an inheritance planning perspective. People naturally have questions about the rules for beneficiaries, and we will answer them here. But first, let’s look at the differences between a traditional individual retirement account and a Roth IRA.
Timing of the Taxation
All the differences between the two types of accounts stem from the way the respective tax structures work. With traditional account, you do not pay taxes at the time of the contributions. You are, however, required to report distributions when you start to accept them.
We say “when” rather than “if” because you are compelled to take required minimum distributions when you are 72 years of age. You can take penalty-free withdrawals when you are 59.5.
If you want to continue to contribute into your account after you are 72, you are free to do so. This is a relatively new development that came about due to a provision contained in the SECURE Act that was enacted at the end of 2019.
Roth account holders make contributions with after-tax income. As a result, distributions of the earnings are not taxable once they reach the age of 59.5. You can extract the contributions at any age without being penalized when you have a Roth account,.
You are never required to make withdrawals because the purpose of mandatory distributions is to generate taxation opportunities. Since the taxes are already paid when you have a Roth account, this is not a motivation.
Rules for IRA Beneficiaries
A spouse beneficiary can roll the account into their own IRA or retitle it as an inherited account. Non-spouse beneficiaries do not have the rollover option, and they must accept required distributions. This is true for Roth and traditional account beneficiaries.
As you would expect, distributions to a Roth beneficiary are not taxable, and traditional account beneficiaries have to report the income. Before the enactment of the SECURE Act, beneficiaries of both types of accounts could take only the minimum that was required for any length of time.
They could maximize the tax advantages and stretch out the distributions for as long as possible. This window of opportunity is now closed, because a provision in the SECURE Act has established a 10-year limit. All assets must be removed from inherited accounts within 10 years.
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Our doors are open if you have already determined that you are ready to work with an Oklahoma City estate planning lawyer to establish a plan. You can send us a message to set the wheels in motion, or we can be reached by phone at 405-843-6100.
After helping his own family deal with a lengthy probate and the IRS following his father’s untimely death in a farm accident, Larry Parman made a decision to help families create effective estate plans designed to reduce taxes, minimize legal interference with the transfer of assets to one’s heirs, and protect his clients’ assets from predators and creditors.
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