Friday, December 04, 2009

Withdrawals from Inherited Roth IRA’s

Withdrawals from an Inherited Roth IRA provide the opportunity to extend the number of years over which the account can continue to grow tax free.

In my previous entry to this site on November 22, 2009, I described the estate tax opportunities available with converting an IRA to a Roth IRA.  Those opportunities are more likely to be fully utilized if your heirs are made aware of and fully understand their options.

A Roth IRA left to your heirs is commonly referred to as an Inherited Roth IRA.  An Inherited Roth IRA is further classified as having either a Spousal Beneficiary or a Non-Spousal Beneficiary.  If the beneficiary is the account owner’s spouse (i.e. Spousal Beneficiary), the beneficiary has the option to either leave the account intact or roll the account into their Roth IRA.  Either way, the spouse is not required to take distributions during their lifetime and can designate their own beneficiaries.

If the beneficiary is not a spouse (i.e. a Non-Spousal Beneficiary), the beneficiary has the option to either take the full distribution by the end of the year marking the fifth anniversary of the account owner’s death or over the life expectancy of the beneficiary.  Planning and communication with the beneficiary are important because if distributions do not begin by December 31st of the calendar year following the owner’s death, the requirement to fully distribute the account balance within five years takes effect.  All distributions under either option are fully tax free.

Failure to take the required distributions described above results in a 50% penalty on the amount that should have been distributed.  It would be unfortunate to pay a 50% penalty on an amount that could be completely tax free.

Posted by Ron on 12/04 at 07:00 PM
IRAs

Monday, November 23, 2009

Roth IRA Estate Tax Considerations

Converting your IRA to a Roth IRA has estate tax benefits that should be evaluated especially if you are unlikely to utilize the Roth IRA account balance during your lifetime.

On October 30th of this year, I posted an entry to this site discussing several items that should be considered in evaluating whether to convert your IRA to a Roth IRA.  One of the items discussed is whether the account owner plans to withdraw the account balance during their lifetime.  This issue is important because of the potential estate planning opportunities for a Roth IRA.

The estate planning benefits are possible because a Roth IRA is not subject to required minimum distributions that are an IRS requirement for traditional IRA’s.  Therefore, the account owner can allow the account to grow tax free during their lifetime and then leave the account to their heirs upon their passing. 

Roth IRA distributions are not subject to income taxes to either the owner or their heirs.  Although the value of the Roth IRA might be subject to estate tax, the account will grow tax free as long as the assets are not distributed to either the account owner or their heirs.

The estate planning strategy is for an account owner to convert an IRA to a Roth IRA and pay the income tax on the conversion immediately.  The Roth IRA then grows tax free for the remainder of the account owner’s life and for a significant portion of the lifetime of the heirs as well.  Therefore, it is not unreasonable for a Roth IRA account to grow tax free for as many as 60 - 70 years. 

Posted by Ron on 11/23 at 05:10 AM
IRAs