How to Use a Roth IRA to Avoid Paying Inheritance Tax

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Smart estate planning will lower the tax bill your heirs pay upon your death, and a Roth IRA is one of the most effective tools that can be used for this purpose. In addition to all of the other positive features of Roth IRAs, there are two reasons to include one in your estate planning.

  • You are not required to withdraw minimum annual distributions from your Roth account. If you don’t need the money, the account can continue to grow in value until your heirs receive it.
  • A Roth account is not included in an estate in a probate process. The balance will go directly to your designated beneficiary.

Key points to remember

  • You don’t have to receive annual distributions from a Roth IRA while you’re alive, so if you don’t need the money, you can leave everything to your heirs.
  • In most cases, heirs can make tax-free withdrawals over a five-year period from the Roth IRA.
  • Spouses who inherit Roth IRAs can treat the accounts as their own. That is, there is no deadline for withdrawals.

You can leave the entire account to your heirs

One of the main advantages of a Roth IRA, unlike traditional IRAs and many other types of retirement plans, is that you don’t have to take minimum required distributions (RMDs) over your lifetime. Since you’ve already paid the income taxes owed on that money, the Internal Revenue Service (IRS) doesn’t care when you use it.

So if you don’t need the money for your living expenses, you can just leave it in the account to keep growing tax free. This makes a Roth IRA a particularly effective vehicle for transferring wealth.

How your heirs can avoid taxes

A spouse can choose to become the Roth IRA account holder without any changes. In other words, no tax should be payable on withdrawals from the account and no minimum distribution is required.

Children and other heirs cannot do this. Most must withdraw all the money from the Roth account within five calendar years of the date it was inherited in order to keep the money tax-sheltered.

Make sure you keep the beneficiary designations on your Roth IRA and other financial accounts up to date, so that the money goes where you want it without delay.

Roth IRA helps you avoid probates

Like the proceeds of a traditional retirement account or life insurance policy, the money you leave to your heirs in the form of a Roth IRA does not have to go through the probate process. . This simplifies and speeds up the payment of funds to your loved ones and can reduce the costs of settling your estate.

Mutual fund companies, banks, brokerage firms, and other financial institutions that serve as custodians for Roth IRAs will typically ask you to name a beneficiary, and sometimes other beneficiaries, when you open your account. Do not name your estate as beneficiary or you will lose the ability to bypass probate.

It is important to designate a beneficiary to ensure that your wishes are carried out after your death. It is equally important to periodically review your beneficiary designations to ensure that they are up to date, especially after major life events such as marriage, divorce, the birth of a child or the death of a child. previous beneficiary. For example, your current spouse might not appreciate seeing your Roth IRA go to a former spouse because you forgot to update the form.


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