Certified Public Accountants

Save 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 continue 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 distributions 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:

1. 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
2. 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 70 1/2. 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 proceeds 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.