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Benefits of Roth IRA accounts in estate planning

by | May 9, 2014 | Estate Planning | 0 comments

Many Florida individuals realize the benefits of using a Roth IRA over a traditional IRA. One such benefit of this financial tool is that the tax is paid upfront, so there is no tax consequence to receiving a distribution. However, some individuals may not realize that Roth IRAs can also be used as estate planning devices.

IRA accounts are included in the account owner’s gross estate. When a beneficiary inherits a traditional IRA, he or she has to pay income tax for the distributions just as the original account owner would have done. Paying taxes upfront helps to reduce the size of a person’s estate. If the person has an estate over $5.34 million at death, the amount of overage will be taxed at a high interest rate. Additionally, paying taxes now protects against beneficiaries having to pay taxes later. The distributions are also tax-free, providing another benefit to the beneficiaries of this type of retirement account.

Converting a traditional IRA to a Roth IRA also brings about several benefits, one of which is the ability to form a Stretch Roth IRA. A beneficiary of a Roth IRA has to take minimum distributions over the course of his or her life expectancy. If the beneficiary is young, this may mean that the distribution amount may exceed the annual earnings of the account. While a beneficiary can take more than the minimum required amount, letting the fund compound can mean that the beneficiary can use the fund to help provide for his or her own retirement.

Individuals who would like to convert their traditional IRA to a Roth IRA may decide to consult with an estate planning lawyer. An attorney of this type may be able to provide information about the benefits and consequences of making this type of conversion.

Source: Investing Daily, “Estate Planning with Roth IRAs“, Bob Carlson, April 25, 2014