Berdon Blogs

T&E TALK: Using a Roth IRA as an Estate Planning Tool

Posted by Scott T. Ditman, CPA/PFS on Apr 24, 2017 9:32:00 AM
Find me on:

A Roth IRA can be a valuable estate planning tool, offering the opportunity for tax-free growth as long as it exists and requiring no distributions during your life — allowing you to pass on a greater amount of wealth to your family. While traditional IRAs are more common, in certain circumstances a Roth IRA might better help you achieve your estate planning goals.

Roth vs. Traditional IRA

With a Roth IRA, you give up the deductibility of contributions for the opportunity to make tax-free withdrawals. This differs from a traditional IRA, where contributions may be deductible and earnings grow on a tax-deferred basis, but withdrawals (less any prorated nondeductible contributions) are subject to ordinary income taxes — plus a 10% penalty if you’re under age 59½ at the time of the distribution.

Roth IRAs enable you to make tax-free withdrawals up to the amount of your contributions at any time.  And withdrawals of account earnings are tax-free if you make them after you’ve had the Roth IRA for five years and you’re age 59½ or older.

Also on the plus side, especially from an estate planning perspective, you can leave funds in your Roth IRA as long as you want. This differs from the required minimum distributions starting after age 70½ that generally apply to traditional IRAs.

So, with a Roth IRA, you can let the entire account grow tax-free over your lifetime for the benefit of one or more heirs. While the beneficiary will be required to take distributions, they’ll be tax-free and can be spread out over his or her lifetime, allowing the remaining assets in the account to continue to grow tax-free.

Limited Contributions

For 2017, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age 50 or older), reduced by any contributions made to traditional IRAs. Your modified adjusted gross income (MAGI) may also affect your ability to contribute, however.

In 2017, the contribution limit phases out for married couples filing jointly with MAGIs between $186,000–$196,000. The 2017 phaseout range for single and head-of-household filers is $118,000–$133,000.

Conversion Question

If your income is too high to contribute to a Roth IRA, consider converting your traditional IRA into a Roth, effectively turning future tax-deferred potential growth into tax-free potential growth. When you do a Roth conversion, you have to pay taxes on the amount you convert. But this also has an estate planning benefit because you’re paying taxes that your heirs might otherwise have to pay later.

If you have questions on how a Roth IRA may fit into your estate plan, contact me at SDitman@BerdonLLP.com or call your Berdon advisor.

Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.

Topics: T&E TALK

About Berdon Blogs

Our experts examine the latest trends, economics, business conditions and industry issues to provide timely information you need to maximize your tax advantages and meet your financial goals.

SALT TALK: Hear an insider’s perspective on the business issues, legislative updates in state and local tax, and tax aspects behind today’s headlines.

T&E TALK: Gain insights into how changes in tax laws, shifts in the financial markets, and regulatory concerns will impact assets and affect preserving and transferring wealth.

TAX TALK: Get an all-inclusive perspective on regulatory changes, industry issues, and trends from our team of multidisciplinary tax professionals – many of whom also hold J.D. and LL.M degrees.

Subscribe to Berdon Blogs

Recent Posts