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Tax Beyond The Grave With A Roth IRA |
You
probably know that a Roth Individual Retirement Account (IRA)
allows your money to grow tax free during your lifetime. But
you may not realize that tax-free growth can con-tinue long
beyond the grave. Although you can’t deduct your Roth
IRA contributions from your income tax, neither you nor your
heirs will ever pay income tax on qualified distributions. They
aren’t included in gross income if the account has satisfied
the five-year holding requirement.
As with traditional IRAs, beneficiaries not needing Roth IRA
funds should defer distri-butions as long as possible. For traditional
IRAs, deferral postpones the tax payments on both contributions
and growth. With Roth IRAs, you’ve already paid tax on
contributions, but deferral lets the assets continue to grow
tax free even after your death.
Choose the Best Post-Death Distribution Option
The distribution rules for traditional IRAs govern post-death
distributions from Roth IRAs. Because Roth IRAs aren’t
subject to minimum distribution rules, your nonspouse beneficiary
generally has two options. He or she can take distributions
either:
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Over
his or her lifetime — in which case payments must
begin by the end of the year after you (the Roth IRA account
holder) die, or |
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By
the end of the year after the fifth anniversary of your
death.
Unless the beneficiary needs assets sooner, choose the
lifetime payment option to continue the assets’
tax-free growth for as long as possible. |
If
your spouse is a beneficiary, special rules apply. Your spouse
may treat the Roth IRA as his or her own or roll it over into
another Roth IRA. Either way, the tax-free growth will continue
during your spouse’s lifetime without any required distributions
— even after your spouse reaches age 701⁄2. And
your spouse may also name a beneficiary, thus further continuing
the assets’ tax-free growth.
Check your Roth IRA agreement carefully. Are its distribution
provisions more restrictive than the law requires? For example,
a Roth IRA agreement may require that post-death distributions
be made within five years of the Roth IRA holder’s death,
not over the beneficiary’s lifetime. This would limit
the assets’ tax-free growth.
Use the Roth IRA as an Estate Planning Tool
A traditional IRA account holder may want to consider the effect
of income taxes on the beneficiaries in determining how to divide
assets among them. For example, you may provide additional assets
to the beneficiary of a traditional IRA to offset the tax that
will be owed on distributions.
Because Roth IRAs grow tax free, avoid liquidating them to pay
estate tax. One solution: Buy life insurance through an irrevocable
trust to make liquidity available to your estate.
Creating a trust to hold the Roth IRA pro-ceeds after your death
may offer advantages. The trustee can defer distributions for
as long as necessary to increase assets. If significant age
disparity exists among beneficiaries, you could use multiple
trusts. Otherwise, payments will be based on the oldest beneficiary’s
life expectancy.
Stretch Tax Savings into the Future
If you want to continue the tremendous tax-saving benefits of
your Roth IRA beyond the grave, plan carefully. That’s
where we come in. We’ll be glad to explain further how
your money can continue to grow tax free and benefit your heirs
long after you’re gone.
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