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What Are the Rules for Inherited IRAs?

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If you never need the money, your individual retirement account can be part of your inheritance plan. There are also people that know all along that are going to be utilizing there IRAs for estate planning purposes.

In this post, we will look at the rules for inherited individual retirement accounts, and we will also take a look at a pending piece of relevant legislation that is being called SECURE Act 2.0.

Traditional vs. Roth IRAs

Before we examine the estate planning implications, we should explain the basic parameters. A Roth individual retirement account is funded with after-tax earnings, and you make pretax contributions into a traditional account.

You can take distributions from a traditional account without being penalized when you are 59.5 years old. The same age threshold applies to Roth account holders when it comes to distributions of the earnings, but penalty-free withdrawals of the contributions are not subject to an age restriction.

Traditional account holders are compelled to take required minimum distributions (RMDs) when they are 72 years old. The age was 70.5 until the SECURE Act was enacted at the end of 2019.

That measure also gave traditional account holders the ability to contribute into their accounts for an open-ended period of time, even after they reach the RMD age. Prior to its enactment, contributions into the account had to stop when the account holder started taking mandatory distributions.

There has never been any age limit for making contributions into a Roth individual retirement account.

Rules for Beneficiaries

The aforementioned SECURE Act included major change that have negative ramifications from an estate planning perspective. Before it came along, the non-spouse beneficiaries of individual retirement accounts could stretch out the distributions for any length of time.

This was called the “stretch IRA” strategy, and it was particularly useful for relatively young beneficiaries of well-funded Roth individual retirement accounts. Roth beneficiaries were in a better position because the distributions are not subject to regular income taxes.

The age of the beneficiary was a factor because the amount of the required distributions would be based on the anticipated longevity and the balance in the account.

Unfortunately, this window of opportunity has been closed by the SECURE Act. Now, all the assets must be withdrawn from an inherited account within 10 years.

Proposed SECURE Act 2.0

A bipartisan bill has been introduced into the House that would make additional changes to the individual retirement account parameters. One of them would increase the required minimum distribution age for traditional account holders. It would go up to 75 under the terms of this measure.

The maximum catch-up contribution for people that are 60 years of age and older would go from $6500 to $10,000. For people that are between the ages of 50 and 60, the $6500 maximum contribution would remain in place.

All employees would be automatically enrolled into group individual retirement accounts that are offered by their employers, and they could opt out if they don’t want to participate.

This bill includes a provision that would allow employers to provide matching 401(k) contributions for employees that are making student loan payments. Another proposed change would increase the maximum savers credit for low to moderate income workers from $1000 to $1,500.

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If you are on this site because you are thinking about working with a Staten Island estate planning lawyer to put a plan in place, there is no time like the present.

There is no one-size-fits-all, cookie-cutter estate plan that is right for everyone. Each family is unique, and your estate plan should be custom crafted to ideally suit your needs.

When you choose our firm, you will receive personalized attention every step of the way, and we will be ready to provide further assistance whenever adjustments become necessary.

You can schedule a consultation appointment right now if you call us at 332-456-0500, and you can fill out our contact form if you would prefer to send us a message.

Neil O'Reilly
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About Neil O'Reilly

Cornelius (“Neil”) J. O’Reilly is an attorney whose practice is focused in the areas of Estate Planning, Estate Administration, and Business Succession Planning. His main goal is to demystify Estate Planning for his clients so they can gain peace of mind knowing that they have provided for their families by passing along their hard-earned wealth and by minimizing the stress they will experience if the client becomes incapacitated or dies. He has created the firm with the belief that an estate plan should be driven by the unique needs and desires of each unique client. That’s why there are no “cookie cutter” plans or canned solutions offered to any client. Instead, Neil helps clients identify their goals and then builds estate plans based on those goals.