Your beneficiaries can enjoy years of tax-free growth and income

Quick Summary

  • Proper estate planning can help minimize taxes for your heirs.
  • Your Roth IRA beneficiaries can enjoy years of tax-free growth and income.
  • You—and your heirs—can take tax-free withdrawals from your Roth.

Estate planning is a critical function of financial planning for individuals. While most people don’t like to think about the end of their life, proper estate planning early in the financial planning process can ensure that your heirs are properly taken care of.

Important: Keep your beneficiary lists up-to-date following marriages, divorces, births, deaths, and other major life events.

There are many benefits of including a Roth IRA in your estate plan. And there are several characteristics that make these accounts ideal for investors who are planning their estates.

You Can Inherit a Roth IRA

One of the greatest benefits of a Roth IRA is that there are no required minimum distributions (RMDs) during your lifetime. If you don’t need the money, you can leave it in the account to grow tax-free. This makes a Roth IR an excellent tool for wealth transfer.

Your beneficiaries can either roll the inherited Roth into their own Roth IRA or cash out the account without penalty, regardless of their age. Typically, Roth IRAs that are inherited and not rolled into an account in the beneficiary’s name must be distributed within five years of the date of death or paid as an annuity over the beneficiary’s life.

You can find out more information about Roth IRA distributions in IRS Publication 590-B.

Roth IRAs Help You Avoid Probate

Like proceeds from a traditional retirement account or a life insurance policy payout, the amount of money you inherit from a loved one’s Roth IRA doesn’t have to go through probate. This speeds up the process of disbursing funds to your loved ones, instead of tying it up in probate.

Mutual fund companies and other financial institutions that host Roth IRA accounts typically require you to designate a beneficiary.

It’s important to designate a beneficiary to ensure your wishes are carried out after you die. For example, your current spouse might not appreciate that your Roth goes to your former spouse because you forgot to update it.

Roth IRA Proceeds Are Not Taxed

Most investors know that the largest benefit of a Roth IRA is that you can withdraw contributions and earnings tax-free in retirement. The same is true if you inherit a Roth IRA as a beneficiary.

The money from a Roth IRA passes directly to your beneficiaries. And they receive the funds, just as you would have in retirement, tax-free. Roth IRAs can help you leave a legacy to your heirs with the proper estate planning. Get started and open a Roth IRA today.



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