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Investment Planning |
Estate Planning Using a Roth IRA
If you are confident that you have excess capital beyond your retirement and life-spending needs, you may use a Roth IRA for estate planning. The Roth IRA is a great tool for leaving assets to your heirs. Estate planning with your Roth works best if you are able to convert an existing IRA to a Roth.
There is no longer an income limitation on a Roth IRA conversion. You can convert your IRA to a Roth IRA and pay taxes on this income now. The money you use to pay your tax liability reduces your estate and, ultimately, your estate's taxes. Secondly, since you're not required to make minimum distributions from a Roth, as you are with traditional IRAs and 401(k) plans, the assets in your Rothcan grow tax-free for your entire lifetime. Upon your death, your Roth will be passed on to your beneficiaries. You should specify your primary and secondary beneficiaries when you set up your Roth; however, you can change your beneficiary designation at any time.
After your death, your beneficiaries will be required to withdraw funds from the Roth IRA over their lifetime. For example, let's say you die with a Roth IRA worth $200,000, and your son inherits your IRA upon your death. Although your son is required to take distributions from the Roth over his life according to the IRS life expectancy table, the Roth has grown tax-free in your lifetime and tax-free during your son's lifetime. Assets withdrawn from an inherited Roth are not taxed, since you havealready paid taxes when you converted the Roth IRA, and all the growth is tax-free.
Estate taxes come into play if you die with assets worth over $1 million in 2011. Currently, the limit is eliminated (temporarily). Although a contributory Roth also qualifies for the estate planning benefits mentioned in this tip series, the assets may not be as substantial compared to a conversion from a traditional IRA to a Roth, since contributory Roth IRAs have been funded with at most just a few thousand dollars per year.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.