Roth IRA and Estate Beneficiaries

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What Is the Advantage of a Roth IRA for Estate Planning Purposes?

One advantage is the savings on taxes you can receive by using a Roth IRA instead of a will. When you pass on funds to beneficiaries through a will, those items may be subject to an estate tax after you have died. However, property in a Roth IRA is not subject to taxes.

With Roth IRAs, contributions to the account are taxed. However, your contributions are not taxed when you withdraw them as long as you follow the proper procedures for the Roth IRA (i.e., having the contribution sit in the account for a certain amount of time and being of a certain age before withdrawing). You have to remember that the purpose of using an IRA is that your final product when you start withdrawing will be larger than your initial investment.  It is much easier to pay a tax on an initial contribution of $5 instead of paying a tax after that $5 investment has grown to $50.

Though you will have to pay taxes on whatever you originally put into the account, neither you nor your beneficiary will be taxed for anything you take out, which makes the savings on an investment in a Roth IRA substantially higher than just having your money directly inherited by a beneficiary through a will.

What's the Difference Between a Roth IRA and a Traditional IRA?

With a traditional IRA, the point is to use up your retirement savings by the time you die. This is enforced by having a mandatory age at which you must start withdrawing from the IRA (70 ½ years old). In addition, you must withdraw a certain amount from a traditional IRA each year depending on your age and the age of any beneficiaries of the IRA.

With a Roth IRA, there is no mandatory time at which you must start withdrawing from the account. If you do not withdraw all the money, or any of the money for that matter, from the account before you die, it is simply passed on to your beneficiaries. This makes the Roth IRA a perfect vehicle for saving securities and money to be inherited by your beneficiaries.  All you need to do is indicate when opening the account who you want to inherit the amount in the account when you die; it does not cost a dime.

Should I Consult an Attorney Before Opening a Roth IRA for My Beneficiaries?

When planning how you will pass on your estate, it is always an excellent idea to consult an attorney who has experience dealing with estate planning. Your attorney can help you understand all the options that are available, and which best suit your needs and wants for an inheritance plan.

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Last Modified: 10-30-2013 12:52 PM PDT

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