Many if not most people have individual retirement accounts that they are contributing into with their senior years in mind. There are two different types of IRAs that are most commonly utilized: Roth IRAs, and traditional individual retirement accounts.
Taxation is a key point of differentiation between these two types of accounts. If you have a Roth IRA, you make contributions into the account after you pay taxes on the income. With either type of account, you can begin to take penalty free withdrawals when you are 59.5 years of age.
Since you already paid your taxes, if you withdraw money from a Roth IRA, you do not have to pay taxes on the income. Plus, since the tax man has been paid, you are never required to take distributions from your Roth IRA.
Things are different with a traditional individual retirement account. Your contributions into the account are made before you pay taxes, so you get a tax break each year, since part of your taxable income is going into the account.
Because of this arrangement, any withdrawals that you take from the account would be subject to regular income taxes. Plus, since the IRS wants to get some money eventually, you are required to take mandatory minimum distributions when you are 70.5 years old.
When you have either type of individual retirement account, you name a beneficiary to assume ownership of the account after you pass away. If your beneficiary is someone other than your spouse, mandatory minimum distributions would be required with either type of account.
The amount of the mandatory minimum distributions would be based on the life expectancy of the beneficiary. A younger beneficiary would be required to take less than an older beneficiary.
The ideal strategy would be to stretch the individual retirement account. To stretch the account, the beneficiary would take only the minimum that is required by law.
Since you made contributions before you paid taxes on the income, if you pass along a traditional individual retirement account to a beneficiary, the beneficiary would be required to pay taxes on the distributions. On the other hand, the beneficiary of a Roth IRA would not be required to pay taxes on the distributions.
When you digest all of this information, you can see that a Roth IRA would be more useful from an estate planning perspective.
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We have provided some basic information about the estate planning benefits of individual retirement accounts in this blog post. If you would like to build on your knowledge, download our in-depth special report on the subject. This report is free, and you can click this link to obtain access to your copy: Free IRA Report.