How to Use a Roth IRA to Avoid Paying Estate Taxes

how to report roth ira on taxes

August 16, 2011

Estate planning is a critical function of financial planning for individuals. While most people do not like to think about the end of their life, proper estate planning early in the financial planning process can ensure that your heirs are properly taken care of. There are many benefits to including a Roth IRA in your estate plan, and there are several characteristics that are available only to Roth IRAs that make these accounts ideal for investors who are planning their estates.

You Can Inherit A Roth IRA

One of the greatest benefits of a Roth IRA, especially when compared to other investment assets such as a Traditional IRA or 401k retirement plan, is that a Roth IRA can be passed on to an heir when you die. There are no required minimum distributions with a Roth IRA. (Compare different retirement accounts and their minimum required distributions. ) While this may not seem like a big deal to Roth IRA account holders, it can make a tremendous difference to your heirs.

Your heirs have the option to either rolling it into their own Roth IRA or cashing out the account without penalty regardless of their age. Typically, Roth IRAs that are inherited and not rolled into an account in the beneficiary’s name must be distributed within five years of the date of death or paid as an annuity over the beneficiary’s life. You can find out more information about Roth IRA distributions in IRS Publication 590 .

Roth IRA Helps You Avoid Probate

Like proceeds from a traditional retirement account or a life insurance policy payout, the amount of money that you inherit from a loved one’s Roth IRA does not have to go through probate. This can speed

up the process of disbursing the funds to your loved ones who may need the money instead of tying up the distribution in probate court. Mutual fund companies and other financial institutions that host Roth IRA accounts for investors typically require account holders to designate beneficiaries of their accounts using specific beneficiary designation forms.

Designating your beneficiaries and keeping those forms up-to-date is very important in order to ensure that your wishes are carried out after you die exactly as you wish with respect to how your Roth IRA assets are distributed to the correct heirs.

Roth IRA Proceeds Are Not Taxed

Most investors know and understand that the largest benefit of the Roth IRA is its tax free withdrawal of contributions, interest, and earnings in retirement. The same is true for Roth IRAs that are inherited as part of an estate plan when someone dies. The money from a Roth IRA passes directly to those persons who are designated on the beneficiary form of the account. Those beneficiaries receive the funds, just like you would have in retirement, tax free.

Roth IRAs are a great retirement tool whose benefits also work well with estate planning and passing on assets to your heirs. The retirement accounts not only keep the government from taxing your investments, but Roth IRAs are an ideal choice of investment to pass on to your heirs with little to no trouble because of their direct payout to heirs and requirement for a slow liquidation after the primary account holder’s death. Roth IRAs can help you leave a legacy to your heirs with the proper estate planning. Get started and open a Roth IRA today .

Features of Roth IRAs that make them great for estate planning are.


Category: Bank

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