If you have an individual retirement account, you may have questions about estate planning implications. We will provide an overview in this post, and we also cover some recent changes and additional guideline revisions that are probably going to be passed this year.
Traditional vs. Roth Individual Retirement Accounts
Traditional individual retirement accounts are funded before taxes have been paid on the earnings, so you pay taxes on less income. That’s the good news, but on the other side of the coin, distributions are subject to regular income taxes.
Roth individual retirement accounts are taxed in the reverse manner. You contribute into the account after you pay taxes on the earnings, and if you take distributions, you do not have to report the income.
Required Minimum Distributions (RMDs)
You have to take required minimum distributions from a traditional account when you reach a certain age. It was 70.5 until the SECURE Act was enacted in 2019. A provision in the measure raised the RMD age to 72 for 2020 and subsequent years.
Earlier this year, the Securing a Strong Retirement Act was introduced to Congress. It is alternately called “SECURE Act 2.0” because it builds on the first piece of legislation. This measure has strong bipartisan supports, so observers feel as though it will pass.
This new measure would provide an additional increase to the required minimum distribution age for traditional account holders. It would go up incrementally until it tops out at 75.
We should point out the fact that Roth individual retirement account holders never have to take required distributions. Why is this the case?
The point of the mandatory distributions is to give the IRS the opportunity to start collecting taxes. Since Roth account holders already paid their taxes, there is no reason for the IRS to require distributions.
Another change that was implement when the first SECURE Act was passed gave traditional account holders the freedom to contribute into their accounts for as long as they are earning income.
Prior to its enactment, the contributions had to stop when the account holder reached the mandatory minimum distribution age. Roth account holders have always been allowed to contribute into their accounts indefinitely.
If SECURE Act 2.0 is enacted, all eligible employees would be automatically enrolled in their workplace retirement savings plans. They would have the freedom to opt out after they have automatically enrolled.
A lot of employees do not contribute into 401(k) plans because they are saddled with student loan payments. Under this measure, employers could choose to provide 401(k) matches of student loan payments that were made by qualified employees.
The savers credit for employees that earn less than a certain amount of money will go from $1000to $1500, and the eligibility parameters would be eased to include more workers.
This legislative measure would also increase the catch-up contribution maximum for older workers. It would go from $6500 to $10,000.
No More Stretch IRA
The SECURE Act put an end to a very popular estate planning strategy called the stretch IRA.
Beneficiaries of both types of accounts must take required minimum distributions on an annual basis. For Roth IRA beneficiaries, the distributions are not taxed, and traditional account beneficiaries have to report the income.
As long as there are assets in the account, it is going to be growing in a tax free or tax-deferred manner. Beneficiaries used to be able to take only the minimum that was required for an open-ended period of time.
A beneficiary of a well-funded account that was relatively young could reap significant benefits, especially if they are receiving tax-free distributions. Unfortunately, a provision in the SECURE Act mandates the closing of all inherited IRAs within 10 years.
We Are Here to Help!
Our doors are open if you are ready to work with a Memphis, Tennessee estate planning lawyer to put a plan in place. You can call us at 866-997-6325 or 901-763-2500 to set up a consultation appointment, and you can alternately send us a message through our contact page.