Roth IRA Estate Planning Strategies

About Bill Broich



To Roth or not to Roth, that is the question


Most people are very well aware of the benefits of building a retirement nest egg using a Roth IRA. One of the less well known aspects of a Roth IRA is how it can be used for estate planning. This is probably because of most of us intend to use the IRA as a source of post-retirement income, so the question of passing on the IRA to your heirs is secondary. It is, however, an essential part of estate planning.

Let’s assume that you do want to pass on the IRA to your heirs, and not to the IRS. In this article, we discuss estate planning strategies for a Roth IRA to help the inheritors of your Roth IRA from being hit with massive income tax liabilities upon withdrawal.

With a traditional IRA, you are mandated by the necessity of initiating withdrawals after age 70 ½ and accompanying withdrawal taxes. With a Roth IRA having no such withdrawal deadline, you have the option of continuing to add to the IRA with tax-free dollars. If you have a traditional IRA and decide you do not need the fund’s post-retirement, you have the option of converting it into a Roth IRA. You would still need to pay tax on earnings and tax-deductible contributions, but if you pay the taxes using other resources, and convert to a Roth IRA, what your heirs get is essentially a tax-free inheritance.

If your heirs don’t need the money immediately, they have the option of accepting payouts over an extended period, with the remaining balance in the account accumulating tax-free. This strategy extends the tax benefits of a Roth IRA across generations, helping a family to leave an IRA virtually untouched, except for withdrawal checks issued to the heir, for over 50 years.

The IRS has no problems with this arrangement. In fact, they have lent a helping hand by not including the minimum withdrawals accepted by an IRA holder for calculating the $100,000 AGI eligibility requirement for being able to convert a traditional IRA to a Roth.

Thus, while you still must pay for the conversion, and assume that neither you, your spouse upon your death, or your heir upon the passing of both spouses, will be in immediate need of the full amount in the IRA. When these conditions are fulfilled, and tax laws governing IRAs remaining as they are, what you leave behind for your heirs is a stream of annuity payments coming out of the mandatory withdrawals, while a significant part of the accumulated funds in the IRA remain safe and tax-free.



About Bill Broich


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