There are some helpful strategies you can choose during the estate planning process that many people never think about. This is one of the major reasons why you should develop a relationship with a licensed attorney that can explain your options to you. Personalized attention is key, and that’s exactly what you get when you work with our firm. With that in mind, we will look at the stretch IRA, an opportunity you may be able to take advantage of if you have an individual retirement account (IRA).
Stretching an Inherited IRA
Though there are hybrids, there are essentially two different types of individual retirement accounts that people typically use: traditional IRAs and Roth IRAs. There are some similarities between the two accounts, but there are also a couple of major differences.
If you have a traditional individual retirement account, you make contributions before taxes are paid on the income. As a result, your taxable income is lower than it would have been otherwise so you get a tax break when you make the contribution. When you are 59 ½ years old, you can start to take penalty free distributions if you choose to do so.
Under some circumstances, you can withdraw money from an individual retirement account before you reach this age without being penalized. You are allowed to use the funds to purchase a first home, and you can take penalty free distributions to pay medical bills or school tuition.
Any distributions would be subject to regular income taxes because you did not pay taxes on the earnings that you conveyed into the account. Because the Internal Revenue Service wants to get its cut at some point, you are required to start taking your mandatory minimum distributions when you are 70 ½ years old.
With a Roth individual retirement account, you make contributions into the account after you pay taxes on the income. You can take penalty free withdrawals without restriction when you reach the age of 59 ½. However, you are never required to take distributions during your lifetime because the tax man has already gotten his money from you.
Assuming you and your spouse don’t need the money while you are living, you could choose to make someone other than your spouse the beneficiary of either type of individual retirement account. The beneficiary would be required to take mandatory minimum distributions, but they could take the least amount that is required by law to “stretch the IRA.”
Distributions to the beneficiary of a Roth account would not be subject to income taxes, but distributions to the beneficiary of a traditional account would be taxable. With a stretch IRA, the money in the Roth account would grow tax-free for an extended period of time. The beneficiary of a traditional account would be able to enjoy the tax deferred growth.
To receive these stretch distributions, people will often name individuals as outright beneficiaries; others will choose to provide some additional asset protection by naming a carefully drafted trust as the beneficiary. In some cases, it may be more tax-efficient to name a charity as the IRA beneficiary. These are options you should discuss with your estate planning attorney.
Download Our Special Report
We have shared some basic information about the estate planning value of individual retirement accounts in this brief blog post. If you would like to learn more, we have a fantastic resource that you can obtain through this website.
Our attorneys have prepared a number of special reports that put many different elder law and estate planning topics under the microscope. One of them is devoted to individual retirement accounts. You can access this report or any of the others free of charge right now if you visit our library of special reports.
Attend an Estate Planning Seminar
If you would like to take your estate planning and elder law knowledge to another level, we invite you to attend one of our upcoming seminars. They are being offered on a complimentary basis, and you can visit our seminar schedule page to see the dates and obtain registration information.
Schedule a Consultation Appointment!
Now is the time for action if you would like to discuss your estate planning goals with a licensed attorney. If you are in North Carolina, you can schedule an appointment if you give us a call at 704-944-3245. Our number in Ashland, Kentucky is 606-324-5516 (or (859) 372-6655 in Florence, KY), and you can send us a message through our contact page if you would prefer to reach out electronically.