IRA Inheritance Planning in Greenville
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IRA Inheritance Planning in Greenville is essential for ensuring that your retirement assets are under proper management and pass on to who you wish. Not all that long ago, you could realistically count on staying with the same employer until retirement and collecting a pension from that employer. In the past, you could count on Social Security retirement benefits to provide a basic standard of living for retirees. Unfortunately, you can no longer count on those days.
Today, most Americans fund their own retirement using tools such as an Individual Retirement Account (IRA). If you are incorporating an IRA into your estate plan or are the beneficiary of someone else’s IRA, you need to understand how to treat that asset for tax and inheritance planning purposes. At ChaceLaw Limited Company, our experienced inheritance planning attorney can help you incorporate your IRA into your overall estate plan. In addition, he can explain how an inherited IRA impacts the beneficiary.
Incorporating Your IRA into Your Estate Plan
If you plan to count IRA funds to support you during your retirement years, you should consider how your estate plan gets affected. Pay particular attention to how your IRA could impact Medicaid eligibility. The longer you live, the greater the odds are that you will need long-term care. Unfortunately, the associated costs of that care are high.
Moreover, neither Medicare nor most health insurance plans will cover those costs. The good news is that Medicaid does cover long-term care; however, you must first qualify for Medicaid. The low income and asset limits can make that difficult without proper planning. Understanding how Medicaid will treat your IRA is a key aspect of that planning.
Unless your IRA is already in payout status, Medicaid will consider it an available resource (asset). An IRA is in payout status if you are taking at least the required monthly distributions. While your IRA is in payout status, it doesn’t count as a resource, but the monthly distributions count as income. As such, your IRA will impact Medicaid eligibility either as an asset or as income.
How Do You Handle an IRA You Inherit?
If you inherited an IRA, you should be aware of how those assets are treated for tax purposes. The same is true if the remaining funds in your IRA are inherited by a beneficiary. If the beneficiary is a spouse and it’s a traditional IRA, the spouse will have some options. Each of these options may have different tax ramifications for that beneficiary:
- Treat it as his/her own IRA by designating himself/herself as the account owner.
- Treat it as his/her own by rolling it over into a traditional IRA, qualified employer plan, qualified employee annuity plan (section 403(a) plan), tax-sheltered annuity plan (section 403(b) plan), or a deferred compensation plan of a state or local government (section 457(b) plan).
- Treat himself/herself as the beneficiary of the IRA.
In case the IRA is a Roth IRA, the account assets must be distributed by the end of the fifth calendar year after your death unless the terms of the account dictate that the assets are to be paid to a designated beneficiary over the life or life expectancy of the designated beneficiary, in which case distributions must begin before the end of the calendar year following the year of the account holder’s death. If the sole beneficiary of an IRA is a spouse, distributions can be delayed until the account holder would have reached age 70½ or the spouse may treat the Roth IRA as his/her own.
Distributions from Retirement Accounts
- Required Minimum Distributions: If you are in payout status, you must take your required minimum distribution (RMD) before year end. The CARES (“Coronavirus Aid, Relief, and Economic Security”) ACT waived RMDs in 2020; however, RMDs must be taken this year.
- SECURE ACT Changes to IRAs: The SECURE (“Setting Every Community Up for Retirement Enhancement”) ACT was signed into law in 2019 and took effect on January 1, 2020, making the following changes to IRAs:
- The Required Minimum Distribution (RMD) Age is now 72. This positive change and will benefit you if you have a large amount of tax-deferred savings in an IRA. You can now grow your IRA money for another year and a half if you don’t need to start taking your RMDs.
- If you are over the age of 70 ½ and have earned income, you can continue to contribute to your traditional IRA. Before this law, if you were 70 ½ or older, you could not contribute to your traditional IRA like you could with a Roth IRA. Now if you are still working, you may continue to contribute all or some of your earned income to your IRA. This is another positive change!
- Lastly, there were changes to eliminate “Stretching” an inherited IRA for non-spouses. Prior to this, non-spousal beneficiaries of IRA accounts like children, could typically take distributions from an inherited IRA over their own life expectancy. That means it could have been drawn out over many years depending on how old they were at the time the account was inherited. This strategy was used to reduce the tax burden of receiving a full inheritance during peak earning years (think 45-65-year-old adult children). Receiving a large inheritance during this time could put your heirs into a higher tax bracket, which would ultimately reduce the inheritance they receive from you.
- Now, the SECURE Act requires most non-spousal beneficiaries to withdraw 100% of the inherited IRA over a 10-year period. This change might impact only IRA heirs set to inherit large amounts. Most heirs typically deplete smaller IRAs within 10 years.
With the passage of the SECURE Act, some clients see the highest impact in one of these three ways. Download our free report on Estate Planning with IRAs to learn more.
Limitations to Contributions
The Internal Revenue Service (IRS) limits the annual contributions individuals may make to their retirement plans:
- For 2022, you can contribute up to $6,000 to a Roth or traditional IRA. If you’re 50 or older, the limit is $7,000.
- The most you can contribute to a 401(k) in 2022 is $20,500, or $26,000 if you’re 50 or older.
- If you have a 401(k) match, the combined limit in 2022 is $61,000, or $67,500 if you’re 50 or older, or 100% of your salary if it’s less than the dollar limits.
Contact Us
Adjust your estate plan if you worry about the tax burden on non-spouse IRA heirs receiving inheritance quickly. Our attorney at ChaceLaw Limited Company can help you better understand IRA inheritance planning as part of your estate plan. Contact our office today by calling (864) 794-6209 or filling out our online contact form.
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