Individual retirement accounts are often going to be part of the plan when you are looking ahead toward retirement, and a certain type of IRA can be useful as an estate planning tool as well.
Conventional Individual Retirement Accounts
With conventional IRAs, contributions that you make into the account can be deducted from your taxable income. The resources placed into the account grow unfettered by taxation.
However, when you start to receive distributions from the account, these distributions are subject to income taxes. You may begin to take distributions without any penalties being imposed when you are as young as 59 1/2.
With these accounts you don’t have the option of letting the money continue to grow unused throughout your life as an estate planning tactic. Once you reach the age of 70 1/2, you are required to start taking distributions.
Roth Individual Retirement Accounts
There is another type of IRA called a Roth IRA. Contributions that you make into this type of account are not deducted from your taxable income. However, this has some benefits in the long run.
You are not required to take distributions out of the individual retirement account when you reach a particular age. It is possible to leave the monies in the account while growth accumulates tax-free.
After you pass away, the beneficiary or beneficiaries that you named when you opened the account assume ownership of the funds tax-free. They will in fact be required to take distributions, but they can choose to accept the minimum amount allowable to maximize the window of tax-free growth.