Understanding IRA Inheritance Planning: Key Considerations

For retirement-focused individuals, the individual retirement account (IRA) serves as a key strategy. These accounts provide an invaluable pool of resources during retirement.

However, there may be instances when you don’t need immediate access to these funds. In such cases, your IRA can form a crucial part of your estate plan.

This article elaborates on important aspects of IRA inheritance planning, focusing on the two popular types of accounts: traditional and Roth IRAs.

Unpacking Traditional and Roth IRAs

The fundamental difference between traditional and Roth IRAs lies in the tax treatment of contributions and withdrawals. You make contributions to a traditional IRA with pre-tax earnings, which subjects withdrawals to regular income taxes. On the other hand, Roth IRAs take post-tax contributions, enabling tax-free withdrawals.

Understand the Age for Penalty-Free Distribution

IRAs are designed to serve during retirement years. Therefore, early withdrawals from a traditional IRA before the age of 59.5 usually face penalties. Exceptions include using funds for medical expenses, education expenses, or up to $10,000 for a first home purchase.

On the flip side, Roth account holders can withdraw contributions penalty-free at any time. Tax-free earnings become available after they hit the age of 59.5.

Decoding Required Minimum Distributions (RMDs)

The Internal Revenue Service (IRS) requires traditional IRA holders to start taking minimum distributions by the age of 73. This allows the IRS to tax the account. As the contributions to Roth IRAs have already been taxed, they do not have RMD requirements.

Impact of the SECURE Act

The SECURE Act, passed in 2019, brought significant changes to IRA rules. The Act increased the required minimum distribution age for traditional accounts from 70.2 to 72. It also enabled traditional IRA holders to keep contributing to their accounts indefinitely, even beyond the mandatory distribution age, much like Roth IRAs.

The Arrival of SECURE Act 2.0

Another IRA reform bill, informally called SECURE Act 2.0, became law in late 2022. This legislation raised the required minimum distribution age for traditional account holders to 73 in 2023, with further increases to 75 in the future. The bill mandates employers to enroll all eligible employees in their 401(k) plans, although employees can opt out. Moreover, employers can now match qualified student loan payments with retirement account contributions.

Demystifying IRA Beneficiary Rules

When it comes to IRA inheritance planning, understanding the rules for beneficiaries is crucial. A spouse inheriting an IRA can either roll it into their own account or title it as an inherited account, becoming the beneficiary.

Non-spouse beneficiaries must take minimum distributions from the inherited IRA. Traditional IRA distributions are taxable for beneficiaries, while Roth IRA distributions remain tax-free.

The SECURE Act significantly altered IRA distributions for beneficiaries. Previously, beneficiaries could stretch out distributions over a long period to maximize tax benefits. Now, they must deplete all IRA resources within 10 years.

Book a Consultation Today!

If you need assistance with your estate planning, our team is ready to help. As an Oklahoma City inheritance planning law firm, we can aid you in creating a comprehensive plan tailored to your needs. To schedule a consultation, please call us at 405-843-6100 or use our convenient contact form to reach out.

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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