Roth IRA for heirs

How to Pass Your Roth IRA to Your Loved Ones

In 2013, the Roth IRA officially became the IRA of choice for those saving for retirement. That year, contributions to Roth IRAs topped $6 billion, while only $4.6 billion was contributed to traditional IRAs.1

It’s clear why so many people are choosing to use Roth IRAs as their primary savings vehicle. The account’s unique tax advantages can help accelerate growth and reduce tax obligations in retirement.

With a traditional IRA, you may get an upfront deduction for contributions. Funds in the account grow tax-deferred, but all distributions from the account are taxable, which could be problematic after you retire.

A Roth IRA, on the other hand, doesn’t offer an upfront deduction, but it does have tax-deferred growth and it also allows for tax-free distributions if you are disabled or older than age 59 ½. The ability to generate a tax-free income stream could help you support your desired standard of living in retirement.

The Roth IRA isn’t just a retirement savings vehicle, though. It can also be an effective tool to pass wealth onto your loved ones after you pass away. Below are a few tips and facts on how you can use a Roth IRA to distribute your legacy to the next generation.

1.) The benefit is tax-free and avoids probate.

The Roth IRA is governed by a beneficiary designation, much like life insurance, annuities, 401(k) plans, and other types of IRAs. That means that it’s not included in your estate or governed by your will.

That means that your Roth assets don’t go through probate, which is the legal process for settling an estate. Probate can generate substantial administrative and legal costs and can delay distribution to your heirs. Instead of waiting on probate, your Roth beneficiaries simply fill out some paperwork, submit the forms to the account administrator, and receive their share of the proceeds.

Also, the Roth IRA assets are distributed tax-free after your death. Just as you don’t pay taxes on your Roth distributions after age 59 ½, your beneficiaries won’t face income taxes for their share of the assets. That could be a valuable legacy for your spouse, kids, or other loved ones.

2.) Your spouse can take over the account.

If you name your spouse as beneficiary, he or she has a number of options in how they take the proceeds. They can take the funds as a tax-free lump sum or they can start a tax-free income stream from the account.
They also have a third option. They can simply assume ownership of the account as if it is their own. That means they can manage the investments, assign new beneficiaries, and keep the funds in the account so they can continue to grow tax-deferred. In that sense, your spouse could then keep the assets in reserve for emergency costs later in life or they can pass it on as their own legacy for kids and grandchildren.

3.) Non-spouse beneficiaries can stretch the assets over their lifetime.

Perhaps you want to leave your Roth IRA to children, grandchildren, or other non-spouse loved ones. You can do that, but they don’t have the same options as your spouse. They can take a tax-free loved one or they can start taking regular income distributions soon after your death, but they cannot assume ownership of the account and let the funds grow indefinitely.

However, they do have a unique option available, known as a “stretch.” They can choose to take tax-free distributions based on their life expectancy. The younger they are, the lower the annual distributions will be since the distributions will need to last over a longer period of time. That means more money stays in the account and continues to grow.

If your non-spouse beneficiary chooses the stretch option, they can essentially create a lifetime tax-free income stream for themselves based on your legacy. That could be a valuable gift for a child or grandchild.

Need help planning your legacy for your Roth IRA and other assets? Let’s talk about it! Contact us today for a FREE financial strategy session. We can help you analyze your goals and needs and develop a strategy that suits your specific objectives.




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