As estate planning and elder law attorneys, we are often asked questions about individual retirement accounts. One of them revolves around the matter of taxation. Many people aren’t sure whether or not inherited IRAs are subject to taxation. The answer is that it all depends on the type of account that is inherited.
There are traditional individual retirement accounts, and Roth IRAs. If you were to contribute assets into a traditional IRA, the contributions would be made before you pay taxes on the income. As a result, when you start to take distributions, they would be taxed at your regular income tax rate. You are allowed to start to accept distributions without being penalized when you are 59 ½ years of age.
This being stated, there are some exceptions to the age rule. People are allowed to take penalty-free withdrawals to pay medical bills, and you can use money in your account to buy your first home without being penalized. College tuition can also be paid in a penalty-free manner.
A person that inherits a traditional individual retirement account would be required to pay taxes on distributions, because the contributions into the account were made before taxes were paid. Things work in the reverse manner with a Roth IRA. Deposits were placed into the account after taxes, so the distributions from the account to the inheritor would not be subject to taxation.
Maximizing Your Social Security Benefit
Most people who are actively engaged in the process of retirement planning are going to rely on Social Security to one extent or another. Even if you have been so successful that Social Security is really not something that you absolutely need, you did pay into it, and every penny that you have earned can be utilized to enhance your legacy and provide for your loved ones after you pass away.
For this reason Social Security is important to the vast majority of people who are reaching retirement age in the near future. Many of them have questions about the specifics of the program and how they can maximize their benefit.
It should first be noted that full retirement age varies depending on the year during which you were born. If you were born between 1943 and 1954, you become eligible for your full Social Security benefit when you reach the age of 66.
The full retirement age then graduates by two months per year. So if you were born in 1955, your full retirement age is 66 years and two months, and if you were born the following year, your full retirement age is 66 years and four months. It continues to rise in this manner until 1960. People born in 1960 and later reach full retirement age on their 67th birthday.
However, you don’t have to apply for Social Security when you reach your full retirement age. You can continue working and receive delayed retirement credits which will increase the amount of your benefit by 8 percent per year until you reach the age of 70. Plus, the amount of Social Security that you receive is calculated based on your 35 highest earning years. So these final three years of working past your full retirement age could replace three years during which you earned less earlier in your career, and your benefit would increase as a result.
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Schedule a Consultation Today!
Now is the time for action if you do not have solid estate plan in place. Our estate planning attorneys would be glad to meet with you in person, gain an understanding of your legacy goals, and provide you with the appropriate guidance.
When the process is completed, you can go forward with the knowledge that your loved ones will be provided for in the optimal manner. If you are ready to get started, click this link to send us a message requesting a consultation or give us a call at 586-493-7661.