When you want to be prepared for the future starting and contributing into an individual retirement account can be a good idea.
In addition to an IRA’s use as a way to generate resources for retirement such an account can also be a good estate planning tool if you want to gain tax efficiency as you set aside resources for the benefit of succeeding generations.
You may begin contributing into a traditional individual retirement account with the expectation of needing these funds yourself when you retire, and along the way you may find that you actually do not need to tap into these resources beyond the minimum requirement. On the other hand, you may know all along that you’re using the IRA as an estate planning tool.
The advantage here is to “stretch” the individual retirement account. If you are contributing into a traditional IRA you are going to be required to pay income tax when you receive distributions. In the event that you do not deplete the funds entirely and pass the remainder along to the beneficiary your beneficiary would be subject to taxation on the distributions.
The longer you can defer taxation the better. Some individual retirement accounts will allow the beneficiary to stretch the IRA by receiving the minimum distribution allowable by the IRS.
When this is done your beneficiary is pulling assets out of the account as slowly as possible. Meanwhile, tax-free gains may be accruing.
The smaller the distributions are the less the tax responsibility is going to be.
It should also be noted that the possible length of the stretch as it were is based on the life expectancy of the beneficiary. The younger the beneficiary is the further the individual retirement account can be stretched.