Millions of Americans have made the decision to utilize a Roth IRA as their primary retirement savings vehicle. In fact, in 2013, contributions to Roth IRAs surpassed annual contributions to traditional IRAs. Americans contributed more than $6 billion to Roth accounts, versus $4.6 billion to traditional accounts.1

There are a number of reasons why so many people prefer the Roth IRA, but one of the biggest is the Roth’s tax advantages. Growth inside the account is tax-deferred. Assuming you are either age 59½ or disabled, distributions from the Roth are tax-free. That means you can contribute money to a Roth, never pay taxes on the investment growth and generate a tax-free income stream in retirement.

The Roth IRA is also an effective tool for passing your legacy on to your loved ones. Unlike the traditional IRA, the Roth doesn’t have mandatory distributions at age 70½. That means you can let your Roth assets grow and accumulate tax-deferred as long as you’d like. Additionally, the Roth death benefit is tax-free and probate-free for your heirs.

There are a few ways in which your Roth assets can be passed on to your loved ones. You can’t dictate how they’ll choose to take the funds, but you can decide whom to name as beneficiary. After naming your beneficiaries, you may want to discuss their options with them in advance so they can make informed decisions after you pass away. Below are some of the ways Roth IRA death benefits are distributed:

Lump Sum

All beneficiaries, regardless of their age or their relationship to you, have the option to take their share of the funds in a lump sum. The distribution is tax-free, and it avoids probate. Beneficiaries can simply fill out a claim form and indicate they would like a check for the lump sum, and the account administrator then issues the payment.

Income Distributions

All beneficiaries also have the option of taking the funds in a series of distributions. Spousal beneficiaries have more flexibility, as they can usually start or stop distributions whenever they’d like. Nonspousal beneficiaries are generally required to start taking distributions soon after your death if they don’t opt for a lump sum.

Account Ownership

Spousal beneficiaries have a unique option in that they can simply choose to take over ownership of your Roth IRA. This is sometimes an appealing option if they don’t wish to take distributions or a lump sum right away. Instead, they can take over the account, invest the assets as they’d like, allow the funds to continue to grow and name new beneficiaries if they wish.

Stretch Lifetime Payments

Nonspousal beneficiaries also have a unique distribution option. They can “stretch” the income over the course of their lifetime. They may be required to take distributions but would also like to keep as much funds in the account as long as possible to maximize the tax advantages. The stretch option allows them to do that.

They can opt to take distributions over their life expectancy. The younger they are, the longer their life expectancy will be, thus resulting in lower annual payments. That leaves more money in the account. Your beneficiary essentially gets a lifetime, tax-free income stream with tax-deferred growth.

Payment to Estate

Finally, it’s possible that your Roth IRA could be distributed to your estate. This happens when your primary beneficiary is dead at the time of your passing and there are no contingent beneficiaries on the account.

A payment to your estate is generally not a desirable outcome. The distribution is taxable, and it could expose the assets to probate, eliminating all the benefits of using the Roth in the first place.

Ready to plan your Roth IRA legacy? Let’s talk about it. Contact us at Intelliplan. We can help you analyze your needs and goals, and then develop a plan. Let’s connect today.


Citation.
1https://money.usnews.com/money/blogs/planning-to-retire/2015/05/29/5-surprising-facts-about-iras

This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

Schedule appointment