Are Roth IRAs Useful for Estate Planning Purposes?

It is wise to look at estate planning as a component within a holistic financial plan. You should prepare yourself for each stage of life as you consider the legacy that you will be leaving behind to your loved ones.

Retirement planning is part of the equation. This is usually going to involve an individual retirement account of some kind. There are traditional IRAs, and there are Roth IRAs. Let’s look at the distinctions between these two different types of individual retirement accounts.

Traditional IRAs

With a traditional individual retirement account, you contribute assets into the account before you pay taxes on the income. Withdrawals from the account are subject to income taxes, so you save now, but you pay later.

When you have a traditional IRA, you can begin taking penalty free withdrawals when you are 59 1/2 years of age. If you don’t need to tap into the account, you cannot sit back and allow the IRA to grow for the rest of your life. You are required to take mandatory minimum withdrawals when you reach the age of 70 1/2.

Roth IRAs

Things are different with Roth individual retirement accounts. You make contributions after you have paid taxes on the income. As a result, if and when you take withdrawals, you don’t have to pay taxes on the income.

With a Roth individual retirement account you can start to take withdrawals when you reach the age of 59 1/2, just like you can with a traditional IRA. However, unlike a traditional IRA, you are not required to take mandatory minimum withdrawals while you are living. You can leave the assets in the account and allow the earnings to grow indefinitely.

Estate Planning Implications

It is possible to use a Roth IRA for estate planning purposes. You could leave the assets in the account throughout your life and name a beneficiary who would inherit the account after you pass away. While you are alive, the assets will continue to grow.

If the account rolls over to your spouse after you die, your spouse would not be required to take mandatory minimum distributions. On the other hand, if you name someone other than your spouse as the beneficiary, this individual would be required to take mandatory minimum distributions.

However, the amount of the mandatory minimum distributions would be tied to the life expectancy of the beneficiary. If the beneficiary takes only the required minimum distributions, the tax advantages will be maximized as the account continues to accumulate earnings.

The younger the beneficiary is, the longer the IRA can be stretched.

Free IRA Report

We have prepared a free special report on the estate planning benefits of individual retirement accounts. If you would like to gain access to this in-depth report, click the following link: Free IRA Report.

Blaine Peterson
Attorney
Parman & Easterday