Why are Roth IRAs Beneficial Estate Planning Tools?
Many people who are investing in their retirement already know how a Roth IRA can benefit them in the long term. However, you may not consider or realize how it can also be an effective estate planning tool. Many older adults choose to convert a regular IRA into a Roth IRA as a means of reducing estate taxes and eliminating the income tax their beneficiaries would be forced to pay on withdrawals from their IRA inheritance.
The following are a few things you should know about using Roth IRAs as part of your estate planning strategy.
There are no yearly mandatory minimum withdrawals
There are different rules governing withdrawals for Roth IRAs compared to standard IRAs. Regular IRAs force you to start taking minimum yearly withdrawals as soon as you turn 70 ½ years old. Then, your standard IRA withdrawals are subject to taxes as well. By converting to a Roth, you eliminate required minimum withdrawals and do not even have to make any withdrawals. If you do, those withdrawals are tax-free.
You will still need to pay income tax on accumulated earnings or tax-deductible contributions when you convert to a Roth IRA. However, if you can afford to pay this tax with non-IRA assets, it’s not a bad hit. It could be worth it in the long run when you consider the savings you would be getting on withdrawals.
What happens when you die?
Upon your passing, your Roth IRA balance is subject to certain minimum withdrawal rules that exist for inherited IRAs. Your heirs will need to start taking mandatory annual withdrawals, which are tax-free if your IRA has been open at least five years as of the dates of the withdrawals. Your heirs would be able to stretch these withdrawals out over the course of their life if they can afford to do so.
For more information on using a Roth IRA as an estate planning tool, consult an experienced Florida estate planning attorney at The Charles Law Offices.