Clearly, an IRA can provide you with a financial underpinning during your retirement years, but you could potentially use an individual retirement account as part of your estate plan as well.
We will look at the details in this post.
Traditional Individual Retirement Accounts
A traditional individual retirement account is funded with pretax earnings. You can begin taking penalty-free distributions from the account when you are 59.5 years of age. Because you didn’t pay taxes on the money that you placed into the account, the distributions would be looked upon as taxable income by the Internal Revenue Service.
This type of account has limited value from an estate planning perspective, because you are required to take distributions when you reach the age of 70.5. You can’t just leave the money in the account until you pass away, because the tax man wants to get his share eventually.
However, under certain circumstances, a traditional IRA can provide estate planning benefits.
There is another type of individual retirement account called a Roth IRA. With a Roth IRA, the tax situation is reversed. You contribute assets into a Roth individual retirement account after you pay taxes on the income.
As a result, you do not have to pay taxes if and when you start to take distributions.
You are not required to take mandatory minimum distributions at any age when you have a Roth IRA, because the IRS has already gotten its money. However, you can start to take distributions without being penalized when you are 59.5 years of age.
Because you do not have to take mandatory distributions, you could use a Roth individual retirement account as an estate planning tool. If you can afford to do so, you could simply allow the account to grow in a tax-free manner throughout your life.
You name a beneficiary, and this beneficiary would assume ownership of the account after your passing. If the beneficiary is someone other than your spouse, the beneficiary would be required to take mandatory minimum withdrawals. The amount of the required annual distributions would be tied to the life expectancy of the beneficiary.
The beneficiary could choose to “stretch” the IRA. You stretch an IRA by taking only the minimum distributions and nothing more. By doing so, you are maximizing the tax-free growth that is accumulating while the account is still intact.
Free IRA Report
We invite you to download our free report on individual retirement accounts if you would like to learn more. This report has been carefully prepared, and it will provide you with a great deal of very useful information.
To access your copy, click this link and follow the simple instructions: Special Report on Individual Retirement Accounts.