Your individual retirement account can ultimately be part of your estate plan if you do not spend the money yourself while you are living. With this in mind, you should understand the relevant details about IRA inheritance planning. We will share them with you in this post.
Traditional Individual Retirement Accounts
If you have a traditional IRA, you make contributions before you pay taxes on the income. This gives you a tax break because you pay taxes on less income. On the other side of that coin, the distributions are subject to regular income taxes.
In spite of this, the conventional wisdom is that you will be in a lower tax bracket when you are retired and drawing income from the account. Traditional account holders are required to take mandatory distributions when they are 73 years of age.
You may be confused by this if you have always heard that the required minimum distribution age is 70.5. This age was in place for years, but it was increased to 72 when the SECURE Act was enacted at the end of 2019, and it was increased again in 2023.
Another change gave individual retirement account holders the ability to continue to contribute to their accounts after they reach the required minimum distribution age. This was not possible prior to the enactment of the SECURE Act.
Beneficiaries of an inherited traditional individual retirement account are required to take distributions. They will also be required to pay taxes on the income.
Roth IRAs
Roth individual retirement accounts are funded with after-tax income. As a result, the distributions are not taxable. Account holders are not required to take distributions when they are 73 because the point of the required distributions is to give the IRS an opportunity to tax the income.
Since the taxes have already been paid when you have a Roth account, they do not have this motivation. Roth account holders have always been able to contribute to their accounts for as long as they are earning income.
As you would expect, distributions that are taken by Roth account beneficiaries are not considered to be taxable income.
Elimination of Stretch IRA
From an estate planning perspective, there was a provision in the SECURE Act that was very unwelcome. Prior to its enactment, beneficiaries of both types of accounts could take only the minimum distributions that were required by law for any length of time.
An account that was very well-funded could remain active for the long haul. As a result, the tax advantages would be maximized. This was especially effective for Roth account beneficiaries because of the fact that the distributions were not taxed.
This was called the “stretch IRA” strategy. Unfortunately, the open-ended stretch is a thing of the past. Under the terms of the SECURE Act, all the assets must be removed from either type of inherited individual retirement account within 10 years.
SECURE Act 2.0
SECURE Act 2.0 was passed in December of 2022, and it went into effect in 2023. One of the changes contained within it raised the mandatory distribution age for traditional account holders to 73. It will eventually go up to 75 years of age over a number of years.
Employers are now required to enroll employees into their 401(k) plans. After an employee has been enrolled, they can opt out if they do not want to participate.
Analysts found that a lot of workers are not contributing to 401(k) plans because they are using the money that they would have otherwise saved to make student loan payments. This measure gives employers the ability to provide 401(k) matches of qualified student loan payments.
In addition, the catch-up contribution for workers who are 50 years of age and older will go up to $10,000 for participants who are 62-64 years of age.
Take Action Right Now!
We are here to help if you are ready to work with an Oklahoma City estate planning lawyer to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 405-843-6100.
The number for our Tulsa location is 918-615-2700 if that office is more convenient for you.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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