There are two different types of individual retirement accounts that are widely utilized: traditional individual retirement accounts, and Roth IRAs. They are similar in some ways, and there are also major differences.
You can start to take penalty-free withdrawals when you reach the age of 59.5 with either type of account. However, you are required to take mandatory minimum withdrawals when you reach the age of 70.5 when you have a traditional IRA.
This is because of the fact that you make contributions into the traditional IRA before you pay taxes on the income. The withdrawals are subject to taxation. The tax man wants to get his cut at some point in time, and this is why you are required to take mandatory minimum distributions.
If you were to pass away and leave the remainder that is in your traditional IRA to a beneficiary who is not your spouse, the beneficiary would be required to take mandatory minimum distributions, and they would be subject to income tax.
Because of the fact that you have to take mandatory minimum withdrawals, distributions to the beneficiary would be taxable, so the estate planning benefits of traditional individual retirement accounts are limited.
However, the beneficiary could take only the mandatory minimum distributions that are required by law each year. This would stretch out the tax-deferred growth.
Contributions into a Roth individual retirement account are made with after-tax earnings. As a result, the withdrawals are not subject to taxation.
You are not required to take mandatory minimum withdrawals at the age of 70.5, because you already paid taxes on the income.
Since you do not have to take withdrawals, if you are in a financial position to do so, you could use your Roth IRA as an estate planning tool. You could allow the tax-deferred growth to take place throughout the entirety of your life.
If the beneficiary who inherits the account after your death is someone other than your spouse, mandatory minimum distributions would be required. However, the beneficiary could stretch out these distributions by taking only the minimum that is required, and these distributions would not be taxed.
Special Report on Estate Planning & Individual Retirement Accounts
We have provided a basic overview in this blog post, but we have also prepared a comprehensive special report that will provide you with more in-depth information about estate planning and individual retirement accounts.
This report is being offered to our readers on a complimentary basis, and you can access your copy quickly and easily through this website.
To obtain access to the free report, visit this page and follow the simple instructions: Free IRA Report.
If you would like to discuss your estate planning goals with a licensed professional, send us a message through our contact page to set up a free consultation: Indianapolis IN Estate Planning Attorneys.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.