When family members think about what assets they may receive after a loved one has passed away, they often think about physical property or sentimental objects. However, another common inheritance is an individual retirement account or an IRA. An IRA allows an individual to save money for retirement with tax advantages. There are strict rules regarding an IRA and how a beneficiary can use it. Because of this, beneficiaries may be confused about how to manage their new IRA and the specificities surrounding the account. Below are common questions and explanations about IRAs and retirement planning.
What is an IRA?
An IRA (individual retirement account) is a financial account set up for individuals to save for retirement. IRAs are either tax-free or are set up on a tax-deferred basis. There are also different types of IRAs, including a traditional and Roth IRA. The major distinction between these two IRAs is the timing of the tax advantages. Traditional IRAs allow individuals to make contributions now and the earnings are tax-deferred until the money is withdrawn. On the other hand, with Roth IRAs, individuals make contributions with money they have already paid taxes on—therefore, the money will grow tax-free.