An Individual Retirement Account (IRA) offers several tax advantages. But for maximum efficiency and benefit, it is crucial that contributors understand its rules regarding contributions and withdrawals.
The government imposes annual contribution limits that vary based on your taxable income and can affect how much an IRA contribution can be made each year.
Beneficiaries of an Individual Retirement Account (IRA) must begin taking required minimum distributions (RMDs) by age 72; with some exceptions made for spouses or those with disabilities who purchase their first home.
Individuals
Government tax incentives to boost retirement savings provide valuable tax breaks; however, when they reach 70-1/2 or death require required minimum distributions be taken by April 1 of the year following or on their death. Therefore IRA account holders must begin taking RMDs by April 1 of that year or when taking required minimum distributions becomes due.
If an IRA is inherited by an individual, their RMDs must be taxed at ordinary income tax rates; however, beneficiaries can choose to spread out withdrawals over their life expectancies.
Inherited IRAs can also pass to trusts. Unlike individuals, trusts are taxed at an accelerated rate – for instance, an individual beneficiary would hit the 39.6% federal income tax bracket at just over $12,000 of income while it can take nearly $400,000 of income for it to reach that same level in terms of federal income taxes.
Therefore, anyone who will act as trustee for an inherited IRA should carefully consider its accelerated withdrawal schedule and consult a trusted estate and financial planning professional for guidance.
Beneficiaries
Beneficiaries of an IRA account have several options when it comes to how they use it – keeping it as-is, rolling over into another IRA, investing it elsewhere or taking required minimum distributions with 10% early withdrawal penalties in place.
Inherited IRAs held by trusts can provide significant tax benefits – but only when managed correctly. For example, the trustee could opt to distribute assets over 10 years so that income tax rates are minimized.
Beneficiaries of an inherited IRA should usually begin taking distributions within five years following the death of its original owners, with additional options for stretching distributions over their life expectancy. Individuals who inherit traditional, SEP or SIMPLE IRAs may consider setting up a charitable remainder trust (CRT), which allows beneficiaries to defer their ultimate distribution to charity until 20 years or their lifetime has elapsed – consult with a tax professional for advice about which options may work for you best.
Trusts
An inheritance of an IRA can be an invaluable gift, yet the government wants its share. While there are legal strategies that may reduce tax liabilities associated with an inherited IRA, working with a professional financial advisor who understands your situation and recommends the most effective strategies is often best. SmartAsset’s free advisor matching tool connects you with local advisors in your area who offer their expertise.
Spousal beneficiaries may treat an inherited IRA as their own and defer the IRS minimum distributions until age 72, while non-spouse beneficiaries must begin taking RMDs within 10 years and pay taxes on them (unless they disclaim assets ). To maximize savings in lower tax brackets or to spread distributions over their lifespan. Under new rules all accounts inherited should be depleted within 10 years unless payments made to eligible designated beneficiaries such as spouse, minor children, disabled or chronically ill individuals.
Estates
The federal government offers tax breaks to encourage retirement savings, but when accounts pass they also take their share. Therefore beneficiaries of an Individual Retirement Account (IRA) should understand its withdrawal rules before taking distributions from it.
Setting Every Community Up for Retirement Enhancement (SECURE) Act mandates that nonspouse beneficiaries must withdraw the full balance of an inherited IRA within 10 years; there are exceptions, however, such as spouses of IRA owners, minor children of said owners, disabled or chronically ill beneficiaries or those less than 10 years younger than the owner (with exceptions made for eligible designated beneficiaries such as disabled or chronically ill individuals who are less than 10 years younger) and heirs not in the highest tax bracket.
Beneficiaries may consult with a financial planner for strategies that will reduce their tax liabilities, such as SmartAsset’s free advisor matching tool. Keep in mind that any withdrawals from an IRA count as income and should always consult their tax professional before making decisions based on them.
