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What is an IRA and What Happens to it After You Pass Away?

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An IRA, Individual Retirement Account, is one of the tools that are available to help people financially prepare for retirement. This type of account is set up through a financial institution and allows for growth with many tax benefits. There are three main types of IRAs, and it is important individuals explore all three before deciding which one will be most beneficial for their retirement investment needs.

What Is an IRA?

An Individual Retirement Account is considered an investment account that is meant to help individuals save for retirement, outside of their work 401(k). Anyone under the age of seventy can open an IRA. Some parents even start these accounts for their minor children and some even children even inherit an IRA.

There are some stipulations with each type of IRA, so it is important to carry out research to determine which will offer the most benefit for the individual. Although individuals can certainly open more than one IRA, they will still be limited by the yearly contributions.

Types of IRAs

There are three main types of IRAs, and they are each beneficial in their own way. The type a person chooses should be based on their own unique financial goals for retirement. Researching the options will help individuals to make the best choice for their retirement needs.

Traditional IRA

A traditional IRA allows individuals to contribute to their account without owing any income taxes until the amount is withdrawn. There are some instances where taxes would be owed, but for the majority, growing the account is a tax-free option. Once a person turns 70 ½ they will be forced to withdraw their required minimum distributions.

Roth IRA

With a Roth IRA, the individual makes contributions to their account from money that has already been taxed, so there is usually no tax implication. Retirees can sometimes deduct from their Roth account without having to pay taxes if certain requirements are met. With this type of IRA, there are no forced withdrawals at any age.

Rollover IRA

A Rollover IRA allows individuals to contribute money from a qualified retirement account. Individuals can move their assets from accounts such as a 401(k) to a traditional IRA or Roth account. With this type of IRA, there are no withdraws to fund the account, the assets are simply “rolled over” to the new account.

What Are the Benefits of Opening an IRA?

There is a range of benefits in opening an IRA. Seeking a financial advisor to ensure an individual is making the most of these accounts is wise.

Benefits of Roth IRAs

· Offers tax-free income for retirement

· Offers plenty of flexibility

· Allows individuals to continue to contribute after the age of 70

· Is considered the best IRA for long-term

Benefits of a Traditional IRA

· Contributions are tax deductible

· There are no income limits

· Offers multiple retirement accounts

· Lower tax liability

There is no cookie-cutter approach that is right for every individual. The type of IRA investment a person chooses should be based on their age, income, and desired financial goals. Putting a retirement plan into action is the best advice for planning for an IRA.

What Happens to an IRA If the Person Dies?

Most people who open an IRA account wonder what will happen to their investment if they die. This is certainly something to consider because individuals want to be sure their money will pass on to their heirs.

If a person owns an IRA, they need to be sure they have a will in place. Their will can stipulate the beneficiary that receives ownership of the account. If no will is in place, the account goes to the estate and is distributed according to state laws.

If a spouse is the sole beneficiary, they have the legal right to take on the IRA as their own. All the standard rules that apply to the beneficiary as far as contributions, deductions, and tax implications.

Spouses can also rollover their deceased spouse’s IRA into their own retirement account. It is important to remember that all deductions are subject to a 10% income tax penalty if any deductions are made before the beneficiary reaches the age of 59 ½.

Heirs need to be aware of the tax implications they may face when inheriting an IRA. There are more restrictions on beneficiaries who are not spouses of the deceased. The following options and restrictions should be considered.

· The beneficiary has the option to cash out the account and they will pay taxes on the distribution.

· If the account holder died before the age of 70 ½, the beneficiary has the right to the 5-year payout rule option.

· The beneficiary has the right to treat the account as an inherited IRA. If the beneficiary chooses this option, they will be required to begin taking out distributions by

December 31st of the year after the account holder’s death.

It is important to note that non-spouse beneficiaries cannot treat the inherited IRA as their own and they cannot roll over the funds into their own retirement account. Legal assistance may be needed if the beneficiary of the IRA is a revocable trust because the distribution rules are more complex and sometimes easily misunderstood. Getting legal help could prevent a person from unexpected tax liabilities that greatly reduce their inherited amount.

Conclusion

An IRA can help individuals retire without so much stress and worry. When an IRA is opened early in life, the account can continue to grow throughout the years, allowing individuals to retire in financial comfort.

When making a decision on the type of IRA, careful thought should be taken. The more research and care that goes into the decision process, the better equipped the individual will be to make the right choice for their retirement needs.

Those who inherit an IRA may want to consult with a lawyer to understand how to take ownership and what distribution and contribution laws apply. Getting legal advice can help individuals to take the right steps to ensure they are carefully following the rules put forth by the Internal Revenue Service.

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