No matter what stage of life you're in, it is never too soon to start planning for retirement, as even the small decisions you make today can have a big impact on your future. While you might already be invested in an employer-sponsored plan, an Individual Retirement Account (IRA) allows you to save for your retirement on the side, and also potentially save on taxes. There are different types of IRAs, too, with different rules and benefits. With a
Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a Traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are
taxed as current income after age 59½. The following infographic will breakdown other main differences you need to know between a Roth IRA and Traditional IRA, highlighting their benefits to help you determine which option is right for your specific retirement goals.
We're here to helpBeneficiaries of retirement plan and IRA accounts after the death of the account owner are subject to required minimum distribution (RMD) rules. A beneficiary is generally any person or entity the account owner chooses to receive the benefits of a retirement account or an IRA after they die. The owner must designate the beneficiary under procedures established by the plan. Some
retirement plans require specific beneficiaries under the terms of the plan (such as a spouse or child). Beneficiaries of an IRA, and most plans, have the option of taking a lump-sum distribution of the inherited account at any time. Beneficiaries must include any taxable distributions they receive in their gross income. The factors that affect the distribution requirements for inherited retirement plan accounts and IRAs include: The spouse of the account owner has more options than non-spouse beneficiaries, if they're the sole beneficiary. Determination of whether the spouse is the sole beneficiary is made by September 30 of the year following the year of the account holder's death. For the year of the account owner's death, the RMD due is the amount the account owner was required to withdraw and did not withdraw before death, if any. Beginning the year following the owner's
death, the RMD depends on certain characteristics of the designated beneficiary and the distribution option chosen by the beneficiary. Death of the account holder occurred before 2020Spousal beneficiary optionsIf the death of the account holder occurred prior to the required beginning date, the spousal beneficiary's options are:
If the death of the account holder occurred after the required beginning date, the spousal beneficiary's options are:
Non-spouse beneficiary optionsIf the account holder's death occurred prior to the required beginning date (or if the account is a Roth IRA), the non-spouse beneficiary's options are:
If the account holder's death occurred after the required beginning date, the non-spouse beneficiary may:
Death of the account holder occurred in 2020 or laterSpousal beneficiary optionsIf the account holder's death occurred prior to the required beginning date, the spouse beneficiary may:
If the account holder's death occurred after the required beginning date, the spouse beneficiary may:
Non-spouse beneficiary optionsIn 2020 and later, options for a beneficiary who is not the spouse of the deceased account owner depend on whether they are an "eligible designated beneficiary." An eligible designated beneficiary is
An eligible designated beneficiary may
Designated beneficiary (not an eligible designated beneficiary)
Beneficiary that is not an individual
Definitions5-year rule: If a beneficiary is subject to the 5-year rule,
10-year rule: If a beneficiary is subject to the 10-year rule,
Eligible designated beneficiary
Designated beneficiary
Required beginning date
Inherited Roth IRAsGenerally, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal. Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent. Distributions to beneficiaries from qualified retirement plansIf the distribution is from a qualified retirement plan, such as a 401(k) or profit-sharing plan, the plan document establishes the distribution options available to satisfy the RMD rules. The plan administrator should provide the beneficiaries with their distribution options. If the beneficiary is the spouse of the account owner, they may have more distribution options available to them in the plan than a non-spouse beneficiary. Beneficiaries should contact the plan administrator for distributions from a qualified plan. Income tax on distributions from a retirement planGenerally, a beneficiary reports pension or annuity income in the same way the plan participant would have reported it. However, some special rules apply. A beneficiary of an employee who was covered by a retirement plan can exclude from income a portion of nonperiodic distributions received that totally relieve the payer from the obligation to pay an annuity. The amount that the beneficiary can exclude is equal to the deceased employee's investment in the contract (cost). If the beneficiary is entitled to receive a survivor annuity on the death of an employee, the beneficiary can exclude part of each annuity payment as a tax-free recovery of the employee's investment in the contract. The beneficiary must figure the tax-free part of each payment using the method that applies as if he or she were the employee. Benefits paid to a survivor under a joint and survivor annuity must be included in the surviving spouse's gross income in the same way the retiree would have included them in gross income. Additional Resources:Publication 590-B, Distributions from Individual Retirement Arrangements
(IRAs) Which of the following are true of traditional IRAs but not of Roth IRAs?Which of the following are true of Traditional IRAs but not Roth IRAs? Contributions may be deductible. Contributions are always deductible. There is a 50% penalty for failing to take the minimum required distribution (RMD).
Which one of the following is true regarding the differences between traditional and Roth IRAs?Which one of the following is true regarding the differences between traditional and Roth IRAs? The funds in a Roth IRAs accrue on a tax-free basis, while the funds in a traditional IRA accrue on a tax-deferred basis.
Which of the following statements is not true about traditional IRAs?All of the following are true regarding traditional IRAs, EXCEPT: An IRA may be deducted from gross income up to the annual contribution limit. Interest earned on IRA contributions is tax-deferred until withdrawn. The correct answer is: Interest earned on IRA contributions is taxable in the year earned.
What is the difference between a traditional IRA and a Roth IRA quizlet?What is the difference between a traditional and a Roth IRA? In a traditional IRA, you pay your taxes after you retire whereas in a Roth IRA, you pay your taxes while you are still working and when you retire, you don't have to pay your taxes.
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