When you are looking ahead toward your senior years, you may contribute into an individual retirement account. An IRA can definitely help you accumulate a nest egg that you can draw from during retirement.
However, an individual retirement account can also be part of your estate plan under certain circumstances. There is a concept called the stretch IRA that can be of value when you are planning your estate.
Before we look at the stretch IRA, we will provide some general information about individual retirement accounts.
Traditional Individual Retirement Accounts
If you have a traditional individual retirement account, you make pretax contributions into the account. When you do this, you wind up paying taxes on less income, and this is an immediate benefit.
When you are 59.5 years of age, you can begin to make withdrawals from the account without being penalized. It should be noted that you could take limited penalty-free withdrawals without being penalized if the money is being used for certain approved purposes. These would include the payment of medical bills, a first home purchase, and educational expenses.
With a traditional individual retirement account, you are required to take mandatory minimum withdrawals at the age of 70.5. This requirement exists because you never paid taxes on the income that you contributed into the account, and the IRS wants to be able to get its share at some point in time.
Because you have to take mandatory minimum withdrawals at the age of 70.5, you cannot allow the account to grow forever, so the estate planning benefits are limited. Plus, the beneficiary would have to pay taxes on the distributions.
Roth Individual Retirement Accounts
Contributions into a Roth Individual Retirement account are made after you pay taxes, so you don’t have to pay taxes if and when you start to make withdrawals. Since you already paid taxes, you are not required to take mandatory minimum withdrawals at any time.
Here’s how a Roth IRA can be stretched. You do not make any withdrawals during your life, so the account grows in a tax-free manner. The beneficiary who assumes ownership of the account after your passing (assuming it is not your spouse) would be required to take mandatory minimum withdrawals (these withdrawals would not be subject to taxation).
However, the beneficiary could choose to stretch the individual retirement account by taking only the minimum that is required by law. In so doing, the beneficiary would enjoy maximum tax-free growth.
This can be a useful strategy if you are in a position to allow the assets to grow throughout your life with the estate planning benefits in mind.
Free IRA Report
To learn more about the estate planning value of individual retirement accounts, download our special report. The report is being offered to our readers on a complimentary basis, and you can access your copy through this page. Estate Planning & Individual Retirement Accounts.
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.