Can an IRA Be Part of My Estate Plan?

Jun 19, 2014

Your estate plan should be viewed as part of a holistic long-term financial plan. It is important to prepare for each stage of life. There are the active retirement years that many people look forward to, but there are also the twilight years that will follow. You should anticipate your expenses and work within a financial framework that leads to a comfortable future.

An individual retirement account is typically going to be part of the plan. Clearly, an IRA can provide you with a nest egg to draw from during your retirement years, and this is the primary purpose of these accounts. However, it is also possible to utilize an IRA as part of your estate plan under certain circumstances.

Traditional Individual Retirement Accounts

With a traditional individual retirement account, you make contributions before you pay taxes on the income. Income taxes would be due when you start to take withdrawals from the account.

You can start to take penalty-free withdrawals when you reach the age of 59.5. You are required to take mandatory minimum distributions when you reach the age of 70.5.

Because you have to take mandatory minimum withdrawals, a traditional IRA is generally not going to be very useful from an estate planning standpoint, but there are certain exceptions.

Roth IRAs

Roth individual retirement accounts work in the reverse fashion. With this type of IRA you make the contributions after you pay taxes. As a result, the withdrawals that you take would not be subject to taxation.

There is another key difference between the traditional IRA and the Roth IRA. When you have a Roth individual retirement account, you are not required to take mandatory minimum distributions when you reach the age of 70.5. As a result, Roth IRAs can potentially be quite useful when you are planning your estate.

If you don’t need the money yourself, you could allow the account to grow tax-free while you are living. After you pass away, the beneficiary that you choose would inherit the account.

Assuming the beneficiary is not your spouse, he or she would be required to take mandatory minimum distributions that would be based on his or her life expectancy. The beneficiary could “stretch” the IRA by taking the minimum distributions over the maximum period of time to maximize the tax-free growth.

The distributions would not be subject to income taxes, because the original contributions were made with after-tax earnings.

If the account rolls over to your spouse, no mandatory minimum distributions are necessary, and your spouse could continue to use the Roth IRA as an estate planning tool.

Free IRA Report

Our firm has prepared a free report on the estate planning benefits of individual retirement accounts. If you would like to access this in-depth report, click the following link: Free Report on Individual Retirement Accounts.



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