You may be familiar with Individual Retirement Accounts (IRAs) as savings tools, but they can also be an important part of a comprehensive estate plan. Following, our Tampa estate lawyers explain how to get the maximum benefits out of your IRA for both yourself and your heirs.
An IRA is a retirement savings vehicle that allows a tax deduction to be taken when you contribute to the account. The maximum contribution in 2021 is $6,000, and those age 50 and over may contribute an additional $1,000. The income is not taxable while the assets are held in the IRA; however, the distributions are included in taxable income when taken in retirement.
This is where the difference between a Roth IRA and a traditional IRA comes in. A taxpayer who contributes to a Roth IRA does not get a deduction for the contribution, meaning they have to pay full taxes on any amount that goes into the account. From there, however, the earnings grow tax-free, and they are generally not taxable when the distributions are made during retirement.
What Contributions Can Be Made?
The contributions you can make to your account depend on your income levels and marital status. Married taxpayers who file joint returns may contribute the full amount if their income is below $198,000 in 2021. A phaseout occurs after $198,000, eventually ending at $208,000, at which point the taxpayer cannot contribute anything if their income is $208,000 or higher. An unmarried taxpayer may make a full Roth IRA contribution if their income is below $125,000 in 2021, with a phaseout up to $140,000, after which point no contribution is allowed.
Who is Eligible for a Roth IRA?
While the eligibility to contribute to a Roth IRA depends upon the taxpayer’s taxable income, anyone may convert their traditional IRA to a Roth IRA. The amount of the traditional IRA is taxable when the conversion is made, meaning they will have to pay taxes based on their income tax rate on the full amount held in the traditional IRA.
What Does an IRA Have to Do with Estate Planning?
Because this tool allows individuals to accumulate a significant savings tax-free over a long period of time, many people will have a large balance in their account when they reach retirement age. Any remaining funds in the IRA can ultimately be passed down to heirs when the account holder passes away. Â The good news is that a beneficiary can be named on a Roth IRA, which allows the funds to pass to the person inheriting the account without having to go through Florida probate. Be sure that your beneficiary designations are up to date, however, as they could end up going through a long and costly probate process if your beneficiary predeceases you and you do not name a replacement.
If you have any questions about the difference between Roth IRAs and traditional IRAs, or if you’d like to have your current estate plan reviewed to see how a Roth IRA could help, please contact our Tampa estate lawyers at (813) 438-8503 to set up a consultation.