There was a time when relying on a pension coupled with Social Security retirement benefits to fund your Golden Years was realistic. Today, however, few employers fund pensions and Social Security retirement benefits have not kept up with the cost of living. Consequently, many Americans choose to contribute to an Individual Retirement Account (IRA)during their working years to ensure they have sufficient assets available when they retire. Understanding the estate planning consequences of an IRA that you pass down to loved ones as well as how an inherited IRA is treated for tax purposes are crucial to inheritance planning. At Stivers Law, our experienced estate planning attorneys can help you with all your IRA inheritance planning needs.

How Does Your IRA Fit into Your Estate Plan?

If you are planning to use your IRA account to support you during your retirement years it is essential that you know how those funds fit into your overall estate plan. For example, your IRA could directly impact your eligibility for Medicaid as a senior. That eligibility may be crucial to your ability to cover the high cost of long-term care (LTC). Neither Medicare nor most private insurance plans will pay for LTC; however, Medicaid does cover LTC expenses for those who qualify.

To qualify for Medicaid, you will need to pass the Medicaid income and asset tests. Your IRA may impact both either your income or the value of your assets. If your IRA is not in payout status, Medicaid will consider the funds in the account to be an available resource (asset). An IRA is considered to be in payout status if you are taking at least the required monthly distributions. If your IRA is in payout status, the monthly distributions will be counted as income when determining your eligibility for Medicaid. With that in mind, your IRA must be considered when incorporating Medicaid planning into your comprehensive estate plan.

How Is an Inherited IRA Treated for Tax Purposes?

When there are funds left in an IRA at the time of the owner’s death, it is important to understand how those assets are treated by tax authorities. If the account is passed down to a spouse and the IRA is a traditional IRA, a spouse will have the following options, each of which may be treated differently for tax purposes:

  • Treat it as his/her own IRA by designating himself/herself as the account owner.
  • Treat it as his/her own by rolling it over into a traditional IRA, qualified employer plan, qualified employee annuity plan (section 403(a) plan), tax-sheltered annuity plan (section 403(b) plan), or a deferred compensation plan of a state or local government (section 457(b) plan)
  • Treat himself/herself as the beneficiary of the IRA.

If the IRA is a Roth IRA, the account assets must be distributed by the end of the fifth calendar year after your death unless the terms of the account dictate that the assets are to be paid to a designated beneficiary over the life or life expectancy of the designated beneficiary in which case distributions must begin before the end of the calendar year following the year of account holder’s death. If the sole beneficiary of an IRA is a spouse, distributions can be delayed until the account holder would have reached age 70½ or the spouse may treat the Roth IRA as his/her own.

Contact Us

The estate planning attorneys at Stivers Law will make sure you understand how your IRA impacts your overall estate plan as well as your intended beneficiary.  Contact our office today by calling (305) 456-3255 or filling out our online contact form.