An individual retirement account (IRA) is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. The 3 main types of IRAs, each have different advantages, are a Traditional IRA, a Roth IRA and a Rollover IRA.
When an individual is fortunate enough to own, or inherit an IRA, there are some new rules they should consider talking to legal professionals about. The new rules are part of the Secure Act that Congress passed last year, allowing people to continue to save money past the old cutoff age 70 and ½ years old, but restrictions have been put on inherited IRAs so talk with an estate planning attorney if you are thinking of bequeathing one, or need to make changes to previous bequests in completed estate planning documents.
Changes after new law.
When an IRA was bequeathed in the past, the person inheriting it could stretch out the withdrawals from the account over a lifetime if they chose to with relatively small withdrawal amounts to keep their income taxes at bay and keeping balances invested. The required annual withdrawals were based on life expectancy. The new rules do not have a mandatory annual withdrawal, but the account needs to be drained within the 10 year timeframe, causing new tax concerns that would leave people paying more in taxes with less time for the money to remain invested and grow. The new rules apply to accounts inherited after Dec. 31, 2019. Heirs of IRA owners who died in 2019 and earlier can still use the stretch approach.
A spouse and an account owner’s children may still inherit an IRA and continue to stretch withdrawals over time, until they turn 18 or 21, depending on the state. People with disabilities and those with chronic illnesses who inherit an IRA also are exempt from the 10-year withdrawal deadline. And a beneficiary who is less than 10 years younger than the account’s owner, can also continue to “stretch” the IRA.
Seek legal counsel.
Individuals who wish to leave an IRA to heirs, but avoid burdening them with a potential tax bill still have options, the account owner can divide the IRA funds among several beneficiaries, giving each less money, and minimizing certain tax concerns. Trusts may be another option as some qualify for stretch IRAs including a “conduit” trust, which immediately funnels required withdrawals from an IRA to the trust’s beneficiary, or an “accumulation” trust, which allows required IRA withdrawals to remain and grow in the trust. Contact Attorney Ron Meyers with questions regarding bequests in your estate planning packages that involve IRA and trusts.
Ron L. Meyers & Associates, PLLC
Address: 475 Park Avenue South, Suite 2100
Manhattan, NY 10016