Roth IRAs and Estate Planning

When people think of estate planning, they do not automatically think of utilizing retirement planning strategies to maximize their estate’s potential. However, there are many benefits available during retirement that can have a significant impact on how you plan your estate. One such vehicle that can allow for more comprehensive estate planning is a Roth IRA. Roth IRAs are a type of retirement savings account similar to a traditional IRA but with some very important differences that could be beneficial to you. CNN Money provides an explanation of the differences between the two types of accounts, and some of the benefits of Roth IRAs that could be applicable to your estate are discussed below.

Benefits of a Roth IRA

The main benefit of a Roth IRA is that it is funded with after-tax dollars. In other words, the money you put into it has already been taxed. That means that money invested into the account can grow tax free and you do not have to pay taxes on the money you withdraw from it at retirement. There are, however, potential tax penalties associated with unqualified early distributions that an experienced estate planning attorney can help you understand.

Additionally, Roth IRAs allow you to withdraw funds without a penalty except for investment earnings before age 59 ½. When converting funds from a traditional IRA to a Roth IRA, there are additional rules you must follow. You can also continue contributing to a Roth IRA no matter how old you are, whereas a traditional IRA prohibits funding the account after you reach the age of 70 ½. Along the same line, you do not have to make required minimum distributions from a Roth IRA like you do with a traditional IRA.

Roth IRAs and Estate Planning

The last two benefits discussed above are the real reason why a Roth IRA can be extremely beneficial in estate planning. Since you can leave funds in a Roth IRA for as long as you like and continue making contributions to the account after you retire. You can allow the account to continue gaining value for your heirs. As you have already paid taxes on the amount of money you have used to fund the account over time, any distributions you take within established guidelines will be tax free.

This benefit can be passed to spouses or other heirs. If you allow your account to continue to grow over time, including after you have retired, any money left in the account if you die can be distributed to your heirs within established distribution guidelines. Beneficiaries can schedule distributions to match their life expectancy and retain a source of financial security in the form of regular distributions that they might not otherwise have with a lump sum benefit through other investment opportunities.

The value of a Roth IRA will be included in the overall value of your estate for estate tax purposes. However, if you have a traditional IRA and choose to convert funds to a Roth IRA, taxes that you must pay on the conversion process can be deducted from the overall value of your estate. This could potentially save your estate and your heirs from tax penalties associated with the overall value of your estate as well as from taxes on qualified distributions from a Roth IRA. Thus, Roth IRAs can be another vehicle for increasing the assets you plan to leave to your heirs.

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