Your individual retirement account will provide a nest egg that you can draw from after you put your working years behind you. If there is something left in the account after your passing, it will be transferred to a beneficiary that you designate.
There are rules with regard to individual retirement account beneficiaries, and there was a significant change when the SECURE Act was enacted at the end of 2019. We will explain the details here, but first, we will provide some background information about these accounts.
Traditional Individual Retirement Accounts
A traditional IRA is funded with pretax income, and this is advantageous while you are working because you pay taxes on less income. Distributions are taxable, but the idea is that you will take them when you are in a lower tax bracket after you retire.
You can make penalty free withdrawals when you are 59.5 years of age, and you are required to take minimum distributions when you are 72. The required distribution age was raised from 70.5 to 72 via the SECURE Act, and there was another beneficial provision.
Prior to the enactment of this measure, traditional account holders had to stop contributing into their accounts when they were 70.5 years old. Now, you can continue to contribute into your traditional IRA as long as you are earning income.
As a result, you can make ongoing contributions to replace or partially replace the required minimum distributions.
Roth Individual Retirement Accounts
The timing of the taxation is reversed when you have a Roth IRA. You contribute into the account after you have paid taxes on your income, so distributions are not taxable.
Since the taxes have already been paid, you can withdraw the contributions at any time without being taxed regardless of your age. The 59.5 threshold does apply to distributions from the earnings in a Roth individual retirement account.
There are no required distributions for people that have Roth IRAs.
IRA Rules for Beneficiaries
Non-spouse beneficiaries are compelled to take required minimum distributions, and this applies to both types of accounts. The monies that are extracted from a Roth account are received tax-free, and distributions from a traditional account to a beneficiary are taxable income.
These accounts benefit the original account holder because they can grow in a tax-free or tax-deferred manner. This also applies to the beneficiary, so it would behoove a beneficiary to keep the account open as long as possible to maximize the benefits.
Prior to the enactment of the SECURE Act, they could implement the “stretch IRA” strategy and accept only the minimum that was required by law for the maximum length of time. Unfortunately, a provision contained in this measure put an end to the practice.
Now, you have to move all assets out of an inherited individual retirement account within 10 years of the time that you acquire the IRA.
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