Are Roth Accounts Better for Your Estate?

Estate planning gets complex sometimes. Clients often ask about the benefits of converting a traditional IRA into a Roth IRA. And there are benefits. So, maybe we should consider them.

Leaving Roth money in an estate has 4 basic benefits.

• Effect on Probate
• Spouses have no Required Minimum Distribution (RMD) amount.
• Non-spouse beneficiaries receive income tax-free.
• All growth is tax-free.

Effect on Probate
Both Traditional and Roth IRAs avoids probate because you can name an individual or Trust as a beneficiary. Conversion allows you to reduce the amount added to your estate tax calculation by the taxes you pay while providing your descendants with a tax-free asset with more value.

Spouses have no Required Minimum Distribution (RMD) amount.
A spousal transfer allows a spouse to treat the Roth account as their own, upon inheritance. They follow the same distribution rules as the original account holder. Non-spouse beneficiaries do need to withdraw a minimum annual amount.

Non-spouse beneficiaries receive income tax-free.
Money from a Roth IRA transfers directly to the beneficiaries. The non-spouse beneficiary will eventually have to take Required Minimum Distributions. They can postpone distributions until the original owner would have turned 70 ½, or December 31 of the year following death. They receive the funds, just like the original account holder would have, all income-tax-free. You must hold your Roth Account for more than 5 years before the transfer to qualify for this income-tax-free status.

All growth is tax-free.
The Roth IRA, as compared to a traditional IRA, allows for tax-free growth. That’s because earnings aren’t included in the owner's income. Instead, growth earnings accumulate on a tax-deferred basis and often are withdrawn tax-free, too.

Roth IRAs can be an extraordinary way to leave a legacy to your heirs with the proper estate planning.

-Clay Wood-