Most folks know that an IRA can provide you with a financial underpinning during your retirement years. However, did you know that you can also use an individual retirement account as part of your estate plan.
Let’s start by looking at the two types of IRAs – traditional and Roth.
A traditional individual retirement account is funded with pretax earnings. One 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 funds that you placed into the account, the distributions will be taxable.
This type of account has some, but limited value from an estate planning perspective, because you are required to take distributions annually when you reach the age of 70.5.
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 with funds that have already been taxed. As a result, you do not have to pay taxes when you take distributions.
Unlike a traditional IRA, you are not required to take mandatory minimum distributions from a Roth IRA, because the IRS has already collected the taxes. If needed, you can take distributions without being penalized when you reach age 59.5.
Because you do not have to take mandatory distributions, you can 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 can 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. The report is available on the Reports section of this website.