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Amato Law, PLLC

New York Estate Planning Attorney | New York

Retirement & Inheritance Planning

IRA and Inheritance Planning

Not all that long ago, a worker could realistically count on staying with the same employer until retirement and collecting a pension from that employer. Social security retirement benefits could also be counted on to provide at least a basic standard of living for retirees. Those days are long gone. Today, most Americans fund their own retirement using tools such as an Individual Retirement Account (IRA). Whether you are incorporating an IRA into your estate plan or are the beneficiary of someone else’s IRA, you need to understand how that asset is treated for tax and inheritance planning purposes.  At Amato Law, PLLC our experienced inheritance planning attorney can help you incorporate your IRA into your overall estate plan and explain how an inherited IRA impacts the beneficiary.

Incorporating Your IRA into Your Estate Plan

One thing you need to consider if you are counting on the funds in an IRA to support you during your retirement years is how those assets will impact other aspects of your estate plan. Pay particular attention to how your IRA could impact Medicaid eligibility. The longer you live, the greater the odds are that you will need long-term care – and the cost of that care will be high. Moreover, neither Medicare nor most health insurance plans will cover those costs. The good news is that Medicaid does cover LTC; however, you must first qualify for Medicaid. The low income and asset limits can make that difficult without proper planning. Understanding how Medicaid will treat your IRA is a key aspect of that planning. Unless your IRA is already in payout status, Medicaid will consider it an available resource (asset). An IRA is in payout status if you are taking at least the required monthly distributions. While having your IRA in payout status prevents it from being considered a resource, the monthly distributions will be counted as income. As such, your IRA will impact Medicaid eligibility either as an asset or as income.

How Is an Inherited IRA Treated?

If you inherited an IRA, or if the remaining funds in your IRA are ultimately inherited by a beneficiary, you should know how those assets are treated for tax purposes. If the beneficiary is a spouse and the IRA is a traditional IRA, a spouse will have the following options, each of which may have different tax ramifications for the beneficiary:

  1. Treat it as his/her own IRA by designating himself/herself as the account owner.
  2. 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)
  3. 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 73 or the spouse may treat the Roth IRA as his/her own.

Distributions from Retirement Accounts

  • Required Minimum Distributions. If you are in pay status, you must take your required minimum distribution (RMD) before year-end. The CARES (“Coronavirus Aid, Relief, and Economic Security”) ACT waived RMDs in 2020; however, RMDs must be taken this year.

SECURE ACT & SECURE 2.0 Changes to IRAs. The SECURE (“Setting Every Community Up for Retirement Enhancement”) ACT was signed into law in 2019 and took effect on January 1, 2020, however shortly thereafter the House and Senate began working on follow-up legislation to address some of the gaps in the law and the new legislation referred to as SECURE 2.0 was passed and enacted on December 29, 2022.  The combined rule changes under SECURE ACT and SECURE 2.0 are numerous.  We offer a snapshot of some of the most significant changes for estate and inheritance planning:  

  • The Required Minimum Distribution (RMD) Age was increased from 70 ½ to 72 in 2020 and further increased to 73 under Secure 2.0 in 2023.

This is a positive change and will benefit you if you have a large amount of tax-deferred savings in an IRA. You can now grow your IRA money for another year and a half if you’re not yet in a position where you need to start taking your RMDs.

  • If you are over the age of 73 and have earned income, you can continue to contribute to your traditional IRA.

Before the SECURE ACT, if you were 70 ½ or older, you could not contribute to your traditional IRA like you could with a Roth IRA. Now if you are still working, you may continue to contribute all or some of your earned income to your IRA. This is another positive change!

  • Lastly, there were changes to eliminate “Stretching” an inherited IRA for non-spouses.

Up until this law passed, non-spousal beneficiaries of IRA accounts like children, could typically take distributions from an inherited IRA over their own life expectancy, which means it could have been drawn out over many years depending on how old they were at the time the account was inherited. This strategy was used to reduce the tax burden of receiving a full inheritance during peak earning years (think 45-65-year-old adult children). Receiving a large inheritance during this time could put your heirs into a higher tax bracket, which would ultimately reduce the inheritance they receive from you.

Now, the SECURE Act requires most non-spousal beneficiaries to withdraw 100% of the inherited IRA over a 10-year period, unless they qualify as a “Designated Eligible Beneficiary” . This change would likely only impact IRA heirs that are set to inherit a large amount since smaller IRA amounts are typically used up within 10 years by most.

With the passage of the SECURE Act, we believe some clients will be impacted in one of these three ways. Download our free report on Estate Planning with IRAs to learn more.

Limitations to Contributions

The Internal Revenue Service (IRS) limits the annual contributions individuals may make to their retirement plans:

  • For 2023, you can contribute up to $6,500 to a Roth or traditional IRA. If you’re 50 or older, the limit is $7,500.
  • The IRA catch‑up contribution limit for individuals aged 50 and over is not subject to an annual cost‑of‑living adjustment and remains $1,000.
  • The amount individuals can contribute to their 401(k), 403(b), and other such retirement plans for 2023 is $22,500, up from the $20,500 limit for 2022. Employees 50 and older contribute an extra $7,500, up from $6,500 in 2022.   
  • The total annual contribution amount (employee plus employer contribution) will increase to $66,000 from $61,000 in 2022. Most companies typically offer 3-6% in matching funds, but there is no limit to the amount an employer can contribute as long as the annual cap isn’t reached.
  • No matter how much money an employee makes, only the first $330,000 is eligible for employer and employee contributions. This cap was put in place to help ensure retirement savings are equitable across the board for all employees.
  • The following 2022 vs 2023 401(K) Match Limits

Contact Us

If you are concerned about the potential tax burden of your non-spouse IRA heirs receiving their inheritance faster, you may need to have your estate plan adjusted. Our attorney at Amato Law, PLLC can help you better understand the best way to treat your IRA in your estate plan for inheritance planning purposes. Contact our office today by calling 212-355-5255 or filling out our online contact form.