One of the primary purposes of responsible, comprehensive estate planning is to make sure that you are able to distribute as much of your estate as possible to your chosen heirs. After all, you worked hard for a lifetime to build your estate and most people engage in estate planning to make sure as much of their estate survives as possible. A recent article from The Motley Fool reminds us of the role Roth IRAs can play in making sure that the inheritances you leave to your heirs do not fall victim to unexpected taxes. This is especially true in today’s world where there is a great deal of uncertainty as to the direction of our nation’s tax system.
Roth IRA Basics
A Roth IRA is an individual retirement plan that allows you to put a certain amount of money into it each year. The money you contribute to a Roth IRA will already be taxed. That means that qualified withdrawals from the Roth IRA will be tax free when you start to take them. Roth IRAs might even provide a tax credit for some of your contributions depending on a number of factors regarding your individual circumstances and financial situation. The earlier you make the choice to start a Roth IRA, the better as a Roth IRA must be active for at least five years prior to your death in order to escape federal income taxes.
Saving on Taxes
Many people elect to make Roth IRAs part of their retirement planning because of the tax-free nature of qualified withdrawals. However, having a Roth IRA may end up providing some tax benefits for your heirs, too. If you plan effectively for retirement and have multiple options for financial stability available to you, leaving the money you have placed in a Roth IRA will allow the money to continue growing. When you nominate a beneficiary for the Roth IRA, they will effectively inherit that asset without significant tax liability. This is especially helpful in situations where the inheritance of a Roth IRA could push an individual heir into another tax bracket.
A Roth IRA beneficiary will be subject to some strict rules imposed by the United States Internal Revenue Service. They will be required to start taking Roth IRA distributions depending on their predicted lifespan, but presuming they do not simply empty the entire asset immediately then the money left in it until they need to begin taking withdrawals will continue to grow.
Converting money to a Roth IRA does not come without some tax liability. However, even the taxes associated with conversion can have a positive impact on some estate by potentially shrinking the estate to a level where it is not subject to estate taxes. An experienced estate planning attorney can help you understand the role a Roth IRA could play in your estate plan and may be able to work with you and a wealth advisor to find the right estate planning portfolio for you.