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Consider a Roth IRA for Estate Planning

There’s considerable talk about potential tax reform in Washington. It is anyone’s guess what that will look like in the end. However, taxes must be a significant concern for those who are doing estate planning in order to pass on their assets to their loved ones. Wise estate planning means you can avoid having a big part of the money you leave your heirs devoured by income taxes. It is a way to move that money to a nontaxable form.

Piggy-2889046_640Motley Fool’s recent article, entitled “A Clever Way to Cut Your Heirs' Income Taxes,” says the money you put into a Roth retirement savings account has already been taxed. It was taxed on the contributions you made or as a rollover from a tax-deferred retirement savings account. As a result, everything in that account is now non-taxable for income-tax purposes. So long as the Roth has been open for at least five years prior to your death, the money in that account is won’t be subject to federal income taxes.

In the event you leave the money in your Roth rather than spending it in your retirement, after your death the account will be transferred to the person you designated as a beneficiary. At that point, the Roth account will be subject to the IRS's rules for inherited IRAs.

The beneficiary must then begin to take distributions based on their predicted lifespan (pursuant to the IRS’s actuarial tables). If your beneficiary doesn't simply blow the money in the account right away, the balance in the Roth will continue to grow tax-free, providing them with some untaxed income in the future.

This estate planning strategy works, if you don't spend the money in the Roth account yourself. As a result, it's important to plan and find other sources of income to finance your retirement, leaving the Roth account for your heirs.

If you didn't set up a Roth account for yourself before you retired, don't worry, you can execute a Roth conversion at any age.

If you want to discuss your estate planning matters with a qualified attorney that can counsel you on the best decisions for your family, just fill out this simple form and we'll be in touch with the answers you need.

Jeffrey Bellomo, Esq.

Reference: Motley Fool (September 14, 2017) “A Clever Way to Cut Your Heirs' Income Taxes”

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