Estate Planning Using a Roth IRA

Estate Planning Blog - JLFranklin Wealth Planning

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 Roth can 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 within 10 years. 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 distribute the full balance within 10 years, the Roth has grown tax-free in your lifetime and tax-free for the 10 years following your death. Assets withdrawn from an inherited Roth are not taxed, since you have already paid taxes when you converted the Roth IRA, and all the growth is tax-free.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 $12.92 million in 2023.