IRA Inheritance Planning FAQs

• • Can a beneficiary let the money continue to grow indefinitely?

• • Non-spouse beneficiaries of both types of individual retirement accounts must take required minimum distributions on an annual basis. The amount of the mandatory distributions will be based on the age of the beneficiary and the balance in the account.Prior to the enactment of the SECURE Act, estate planning attorneys used to recommend a strategy called the “stretch IRA.” The idea was to take only the minimum that was required by law for the maximum period of time to take full advantage of the tax benefits.This strategy was especially useful for relatively young beneficiaries of Roth individual retirement accounts that were especially well-funded. Unfortunately, this open-ended stretch is a thing of the past because of a provision contained within the SECURE Act.Now, all the assets must be removed from both types of accounts within 10 years.

• • Is the taxation the same for beneficiaries?

• • Yes, the beneficiaries of traditional accounts have to pay taxes on the distributions, and distributions to Roth account beneficiaries are not taxed.

• • Can you contribute into your account after you are 72 years old?

• • Yes, this is a new provision that was included in the SECURE Act that was enacted in 2019. Tradition account holders can now keep contributing when they reach and exceed the mandatory distribution age.Roth account holders have always been able to contribute into their accounts for open-ended periods of time.

• • Do you have to take distributions if you don’t need the money?

• • Once again, this is a question with a different answer depending on the type of account that you have. You have to take distributions from a traditional account when you are 72 years of age, but there is no distribution requirement for Roth accounts.

• • What is the penalty, and are there any exceptions?

• • There is a 10 percent early withdrawal penalty, and the income would be taxable except for Roth account contribution distributions.The answer to the second portion of the question is yes, there are exceptions. You can take up to $10,000 out of the account to help finance a first home purchase. Distributions that are used to pay medical bills or higher education tuition are not penalized.If you withdraw money from the account to pay for health insurance premiums when you are unemployed, there would be no penalty.

• • When can you start to take penalty free distributions from your individual retirement account?

• • For a traditional retirement account, you can make penalty-free withdrawals without conditions when you are 59.5 years old.The arrangement is somewhat different for Roth account holders. They can remove their contributions without being penalized at any age, but the 59.5-year threshold applies to the earnings.

• • Are individual retirement account distributions taxable?

• • The answer is yes and no. Traditional accounts are funded with pre-tax earnings, so the distributions are subject to taxation.Roth account holders fund their accounts with after-tax income, so their distributions are not taxable.

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