When you hear about individual retirement accounts or IRAs you are invariably going to envision a nest egg that you can tap into during your retirement years. Indeed, that’s what these accounts are usually used for, but a certain type of individual retirement account also has estate planning applications.
First let’s take a look at conventional individual retirement accounts. With these accounts, you make contributions before paying taxes. You can deduct the contributions when you are reporting your income to the IRS. The maximum contribution allowable in 2013 is $5,500, or $6,500 if you are 50 or over.
You may start to take penalty-free distributions from the account when you are as young as 59-1/2 years of age. The account holder must start taking required minimum distributions by April 1 following when he or she reaches the age of 70-1/2.
Because you have to take required minimum distributions, as an estate planning strategy you can’t choose to leave the account untouched as untaxed interest accrues.
On the other hand, with a Roth IRA you are not required to take distributions at any particular age. This is because of the fact that you make the contributions into the account after paying taxes on the contributed earnings.
As a result, you could in fact choose to allow the assets in the account to accumulate until you pass away. At that time your beneficiary would have access to the funds, and the beneficiary would be required to take required minimum distributions.
However, if the beneficiary did in fact take the minimum allowable amount annually he or she would be taking maximum advantage of the accrual of tax-free earnings. The required minimum distribution is based on the life expectancy of the beneficiary, so the younger the beneficiary is the longer he or she would be able to stretch the IRA.
