Retirement accounts are important assets. Currently, Roth IRAs (Individual Retirement Account) have the following rules:
-Only those singles with income below $137,000 or couples below $203,000 can contribute
-Annual contributions are limited to $6,000 or $7,000 if you are 50 or older.
-The account grows income tax free and is distributed after 59½ free of income tax.
-There is no Required Minimum Distribution (RMD) even after you are 70½.
-You can’t withdraw within 5 years of your contribution without a penalty
Regular IRAs and 401ks have the following rules:
-You contribute pre-tax income to the account. (Your contribution is not taxed that year.)
-You can continue to contribute after 70½.
– There is no RMD until age 70½.
-The account grows income tax free but when distributed it is fully taxed as ordinary income.
Stretch IRAs is a strategy—not a product. Inherited IRA’s are IRA’s that are given to anyone other than the original owner or his/her spouse; normally these are in the hands of children or grandchildren. A stretch IRA simply means that a beneficiary takes the minimum distribution required each year and allows the balance to grow income tax free. There are required minimum distributions each year for inherited IRAs regardless of the beneficiary’s age.
WARNING: Congress is looking at making significant changes to the required minimum distributions for inherited IRAs. The US House of Representatives has passed a bill and sent it to the US Senate but nothing been approved yet by the US Senate. Political pundits predict that something will become law before the end of 2019. Changes could include delaying the RMD age to 72, but more importantly requiring the entire retirement account to be distributed and taxed within 10 years or less, depending on what version of the bill passes Congress. Either way, it will change the way caring people design their estates for the benefit of their children and/or grandchildren. Those folks who have created an IRA Trust or Retirement Trust must have their trust amended or change the beneficiary designations or both. Most IRA Trusts are “conduit” trust that require minimum distributions—which if this bill passes will be a disaster for these trust payouts—the result will be minimums for 9 years and the balance distributed in the 10th year with the tax bill to go with it. Stay tuned to Congress this Fall.