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Offered by Dolan & Associates, P.C.

You may begin withdrawals on your traditional Individual Retirement Account without penalty once you reach age 59½. You must begin taking withdrawals from your traditional IRA by April 15 of the year following the year in which you turn age 70½.

How traditional IRAs are handled on death is often misunderstood. The tax on an IRA account is only due if you draw the money out of the account. Just because you die does not mean that the money must be drawn out of the IRA. On death, if your spouse is the named beneficiary, your spouse can rollover the IRA account into their own IRA account.

If someone other than your spouse is named as the beneficiary, different rules apply. In the proper circumstances, the beneficiary can continue the income tax deferral of your IRA over the balance of their life expectancy. This is not an IRA rollover. It is still your IRA, “for the benefit of” your beneficiary. The beneficiary will be required to make Required Minimum Distributions based on their life expectancy even though they may be younger than age 70½. The beneficiary can always take more than the required minimum.

Unfortunately, a “beneficial IRA” does not have the same protections from creditors as a traditional IRA account. As a result, if your beneficiary suffers a catastrophic illness, gets divorced, or has a creditor issue, the “beneficial IRA” will be at risk. Therefore, you should consider forming a protective trust to hold the IRA account for your beneficiary upon your death.

How you name your beneficiaries on your IRA accounts and how they interact with your estate plan is critical to maximizing the continued income tax deferral of your IRA accounts, and ensuring that the IRA is protected and available only to your family members.

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