Did You Know These 4 Facts About Roth IRA Death Benefits?

Are you considering using a Roth IRA to save for retirement? Or are you thinking about converting a traditional IRA into a Roth? If so, you’re not alone. The Roth IRA is one of the most popular retirement savings vehicles, primarily because of its tax advantages and flexibility.
 
With a Roth IRA, you don’t get an upfront deduction for contributions as you do with a traditional IRA. However, you do get tax-deferred growth while the funds remain in the account and tax-free distributions assuming you are either disabled or 59 ½ or older.

A Roth IRA isn’t just an effective retirement savings tool though. You can also use it to pass assets onto your spouse, kids, grandchildren, and other loved ones. In fact, your beneficiaries will have a number of unique options available when deciding how best to take the Roth IRA proceeds. Below are a few interesting facts about Roth IRA death benefits to inform your decision making.

The Roth IRA proceeds are tax-free and avoid probate.
You’re not the only one who benefits from the Roth IRA’s tax advantages. Your beneficiaries also have the ability to take their distributions tax-free after you pass away. That’s not always true of other assets with beneficiary designations, such as annuities, 401(k) plans, and traditional IRAs.
 
The Roth IRA death benefit also avoids probate, which is the legal process for settling one’s estate. Probate can be lengthy and can generate significant administrative costs. The Roth assets can be distributed to beneficiaries regardless of whether the probate process is complete.

Your spouse can takeover your Roth IRA.
A spouse beneficiary has a number of options with regard to a Roth IRA death benefit. He or she can take the funds in a tax-free lump sum or in a series of distributions. There is also a third option to simply take over ownership of the account. If your spouse chooses this option, he or she can leave the funds in the Roth indefinitely, allowing them to continue to grow tax-deferred.

A non-spouse beneficiary can “stretch” Roth IRA distributions.
A non-spouse beneficiary like a child or grandchild can’t takeover ownership of the account, but they can stretch out distributions over their lifetime. Under this option, the beneficiary chooses to take regular distributions based on their life expectancy. Funds that aren’t distributed stay in the account and continue to grow tax-deferred.
This option can be appealing for a younger beneficiary. The younger they are, the longer their life expectancy will be. A longer life expectancy usually means lower annual distributions, which keeps more money inside the Roth IRA. Using this strategy, a beneficiary could create a stream of lifetime, tax-free income.
A missing contingent beneficiary designation could cause complications.
 
When you pass away, your primary beneficiaries will have the first right to access the funds. However, what happens if your primary beneficiary is also deceased? In that instance, the contingent beneficiary receives the proceeds.
 
Too many people, though, make the mistake of not listing a contingent beneficiary. The result is that the proceeds are paid to your estate. That is a taxable distribution and it also exposes the funds to probate, essentially eliminating many of the benefits of using the Roth in the first place. Make sure your beneficiaries, both primary and contingent, are up to date.
 
Ready to plan your Roth IRA strategy? Let’s talk about it. Contact us at Fenton Financial Service. We can help you analyze your goals and develop a plan. Let’s connect today.
 
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