Copyright © Nolo Press 1998
The new "Roth IRAs" are all the rage these days. Everywhere you look, ads urge people to think about opening one of these accounts or converting an existing IRA to Roth form. What's been overlooked, in the excitement about tax-friendly ways to save for retirement, is that the Roth IRA can also be a great way to leave money--lots of it, if you're a supersaver--to your heirs without probate.
Roth IRA BasicsContributions |
Unlike an IRA, Keogh, 401(k) or 403(b) plan, contributions to a Roth IRA are not
tax-deductible. So what's behind all the Roth IRA hype? The big selling point is that when
you're ready to withdraw money from the account, what you take out--including everything
your contributions have earned over the years--is not taxed. (The only restriction: the
account must have been open for five years.)
That can make a huge difference if the account value grows significantly and you want to
withdraw money while you're still in a higher tax bracket. Think of it this way: It's far
better to pay a tax on the $1 you contribute to a Roth IRA now, and no tax on the $10 you
withdraw 30 years later, than it is to pay no tax on the $1 you contribute to a
conventional retirement plan and a hefty federal income tax (up to 39.6%) on everything
you withdraw later. The longer you save, the bigger the likely benefits. Some financial
advice-givers opine that a Roth IRA must be open for at least 10 years for it to beat out
a traditional IRA.
Unlike traditional plans, the Roth IRA also provides a way to pass a large amount of
money, without probate, at your death. With a traditional IRA, you must start making
withdrawals after you reach age 701/2. The amount you must withdraw each year depends on
your age and the age of the beneficiary of the account--that is, the person you've named
to inherit it at your death. The idea is that you will use up your retirement account by
the time you die.
But a Roth IRA has no mandatory withdrawals. That means you can let the account keep
accumulating income, tax-free, until your death, when it will pass to the person you've
named. The only constraints on the amount of money you can pile up are the contribution
limits (currently, $2,000 per person per year) and your investment choices.
Passing this money to your heirs is easy, and it doesn't cost a dime. All you do is name
someone, on the form the account custodian gives you, to inherit whatever is in the
account at your death. If you name more than one beneficiary, they'll split the money
equally unless you specify otherwise. You don't need to mention the IRA in your will or
living trust; the beneficiary form takes care of everything.
After your death, the beneficiary will need only a certified copy of the death certificate
to claim the funds, quickly and without probate.
More Information About Roth IRAsTo get an idea of whether or not a Roth IRA is for you, you can analyze your individual circumstances with software available at these web sites: Roth IRA conversion calculator: See whether or not it seems to make sense to convert an
existing IRA, at www.msco-cpa.com/rothira.htm |
Roth IRA Web Site Editor's Note: The above copyrighted article was
reprinted by permission. It also appears at the Nolo
Press web site at http://www.nolo.com/chunkep/iras.html.