Roth IRAs as Estate Planning Tool

Even though a tool may not originallybe designed for the job at hand, it doesn’t mean that the tool won’t get thejob 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 itcomes to retirement and estate planning, wouldn’t it be nice to kill two birdswith 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 itupon deposit or at withdrawal? The article also explores other importantdistinctions.

You pay taxes only uponwithdrawal from a plain vanilla IRA, not upfront upon contribution. Result:every cent can appreciate safely without taxation until the day that you (andthe IRS) can start drawing from the account. In addition, shortly after youreach age 70 ½ annual withdrawals become mandatory. These are known as RequiredMinimum Distributions (RMDs).

On the other hand, a Roth IRA is a plain vanilla IRAin reverse. You pay income taxes upfront at deposit. Result: every centpost-contribution appreciates safely without taxation thereafter. Period.Obviously, this tax-free feature can come in handy for retirement, but considerits inheritance benefit too. What if you were to leave a Roth IRA to an heir bylisting them as a beneficiary? First, there is no income taxation burden thataccompanies the Roth IRA when withdrawn by your heir. Second, the heir canelect to receive it as a tax-free lump sum or, what is often more useful, takescheduled RMDs over their lifetime much like an annuity (but without any incometaxes due). 

Understanding the complexities of Roth IRAs is just a part of successful estate planning. To ensure a successful plan, weat Idaho Estate Planning will: 1) educate you and your helpers; 2) take thetime to get to know you, your family, your desires, your concerns, your goals,and your potential problems; 3) gladly and patiently answer questions until youunderstand the concept or issue; and, 4) based on experience with the problemsand results caused by poor planning, help you design and implement the planthat fits your concerns and goals. Remember, good planning is no accident.


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