As I have previously shared with you, The Secure Act has changed the way many families are planning. Moreover, the IRS recently proposed additional changes to IRAs. Every time the laws change, we keep seeing new restrictions and more planning challenges.

Being forced to distribute everything in an inherited IRA over 10 years makes your IRA more difficult to plan for from an estate planning standpoint. If your family legacy includes a substantial IRA, there are options for you to consider.

First, identify your estate planning goals. Ask yourself if you have met with someone who focuses their professional practice on estate planning. You are going to need some expert guidance here.

If you are married and have an IRA and/or life insurance, your spouse is likely the beneficiary on these. If you are not 100% sure who is named as your beneficiary of your IRA and/or life insurance, check and update your beneficiaries.

Next, think about taxes for you and your spouse and any non-spousal beneficiaries. Remember, withdrawals from Roth IRAs are not generally taxable. But will beneficiaries besides your spouse be able to pay the taxes on IRA distributions, or will they need to use a percentage of the IRA distributions to pay taxes?

The Roth IRA provides an excellent alternative to getting abused by the SECURE Act’s impact on inherited IRAs that restricts the maximum stretch period to 10-years. Taxes are paid when the Roth IRA is funded so no taxes are due when you make withdrawals, there are no mandatory withdrawal requirements, and the ROTH grows tax free over time. But are you eligible to set up a Roth IRA?

“Your eligibility to open a Roth IRA and how much you can contribute is determined by your Modified Adjusted Gross Income (MAGI). If you are a single or joint filer, your maximum contribution starts to reduce at $125,000 and $198,000 for tax year 2021, and $129,000 and $204,000 for tax year 2022, respectively.” See Schwab

You can convert your traditional IRA to a Roth IRA, but you will pay taxes on the conversion amount.

Another caveat is that the Roth IRA conversion has a 5-year requirement where the converted funds must remain in the account for 5 years before the favorable Roth IRA rules apply.

Additionally, Roth IRAs may be bequeathed to your heirs income-tax free. Provided the five-year rule has been met, non-spousal beneficiaries can receive withdrawals from Roth IRAs tax-free.

However, similar to traditional IRAs, Roth IRAs are not exempt from federal and state death or estate taxes. So, following the conversion and paying the taxes at that time you minimize income taxes for heirs, but federal and state death or estate taxes may be due at your death.

Conversely, because of the income taxes that will be due upon conversion, consider doing a Roth IRA conversion over time. Work with your estate planning attorney to determine the optimum timing to convert to minimize your income tax burden and plan for the years when your income is lower.

This strategy with Roth IRAs can be used with all or a portion of your traditional IRA, protecting part of the IRA for the next generation while using part of the funds for retirement. Your estate planning attorney can help you determine options that meet your goals moving forward.

Contact our team at Borkuslaw Group today and make a live or online appointment and request an estate plan life insurance consultation!

Please note that information contained in this news alert is not and should not be construed as legal advice or opinion nor does this information alert create an attorney-client relationship.

About the Author: Randall Borkus

We believe that business succession, asset protection and estate planning are less about numbers and much more about helping people preserve, protect, and provide for who and what is most important to them.