Gray & Harasym, LLP | San Luis Obispo CA CPA

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A Roth IRA - Benefits for Your Beneficiaries

Did you know that a Roth individual retirement account (IRA) can be more than a source of retirement income for you? If you have sufficient retirement funds and are looking for a way to leave your heirs a tax-advantaged financial legacy, a Roth IRA may be an option to consider.

Traditional to Roth

If you already have a traditional IRA, you may be able to convert it to a Roth IRA. Although annual contributions to a Roth IRA are restricted for high earners, the income limitations do not apply to Roth conversions. You may convert a traditional IRA to a Roth IRA regardless of income. Keep in mind, though, that the amount you convert to a Roth IRA will be subject to ordinary income tax for the current calendar year.

Advantages for You

But there are other tax advantages. The amount of income tax you pay on the conversion will reduce your gross estate, which could result in a lower federal estate tax bill if your estate is large enough to be subject to tax. Once you've owned a Roth IRA for five tax years and are age 59½ or older, become disabled, or die, withdrawals from your Roth IRA are tax free. And since a Roth IRA doesn't require minimum distributions once you reach 72, all of your IRA assets can continue to grow income tax free, leaving your beneficiaries more assets.

Advantages for Your Beneficiaries

Generally, any money remaining in your account will pass income tax free to your heirs. And even though beneficiaries are required to take minimum distributions, the distributions can be spread out over the lifetime of a beneficiary. If your beneficiary is young enough, the Roth IRA potentially can provide many years of tax free growth.

Is This the Right Estate Tool for You?

For this strategy to work, you need to be reasonably sure that you won't need the money in your Roth account during your lifetime. Your financial professional and estate planning professional can help you decide if a Roth IRA would be a worthwhile estate tool for your situation.