Seniors who convert a regular IRA into a
Roth account can reduce their estate taxes and eliminate the income tax their
heirs would otherwise have to pay on withdrawals taken from an inherited
regular IRA.
Seniors
who convert a regular IRA into a Roth account can reduce their estate taxes and
eliminate the income tax their heirs would otherwise have to pay on withdrawals
taken from an inherited regular IRA.
Even though a tool may not originally
be designed for the job at hand, it doesn’t mean that the tool won’t get the
job done. One such tool in the estate planning world is the Roth IRA.
As with an IRA of any stripe,
the Roth IRA is a retirement account. Unlike its plain vanilla IRA cousin,
however, the Roth IRA offers significant estate planning opportunities. When it
comes to retirement and estate planning, wouldn’t it be nice to kill two birds with
one stone?
A recent SmartMoney article titled “Estate Planning With a Roth IRA”
tackles the salient differences between a plain vanilla IRA and a Roth IRA,
noting that a fundamental distinction is when the income tax is paid. Is it
upon deposit or at withdrawal? The article also explores other important
distinctions.
You pay taxes only upon
withdrawal from a plain vanilla IRA, not upfront upon contribution. Result:
every cent can appreciate safely without taxation until the day that you (and
the IRS) can start drawing from the account. In addition, shortly after you
reach age 70 ½ annual withdrawals become mandatory. These are known as Required
Minimum Distributions (RMDs).
On the other hand, a Roth IRA is
a plain vanilla IRA in reverse. You pay income taxes upfront at deposit.
Result: every cent post-contribution appreciates safely without taxation
thereafter. Period. Obviously, this tax-free feature can come in handy for
retirement, but consider its inheritance benefit too. What if you were to leave
a Roth IRA to an heir by listing them as a beneficiary? First, there is no
income taxation burden that accompanies the Roth IRA when withdrawn by your
heir. Second, the heir can elect to receive it as a tax-free lump sum or, what
is often more useful, take scheduled RMDs over their lifetime much like an
annuity (but without any income taxes due).
Be sure to consult with
qualified legal and financial counsel to evaluate how to leverage a Roth IRA
for yourself and your loved ones.
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Reference: SmartMoney
(February 5, 2013) “Estate Planning With a Roth IRA”