Roth IRAs are getting a lot of attention these days. I get a lot of questions about how to use a Roth IRA in an estate plan if you want to take advantage of tax-free growth your account will enjoy when you leave it to your children or grand children. Some retirees convert their IRAs to Roths even if they’re not convinced the move will pay off for them. Why? It will almost certainly pay off for their heirs. A Roth was always a great way to leave money to your children, but in 2019 the SECURE Act made it even more attractive.
Under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, children and other nonspouse heirs who inherit traditional IRAs no longer have the option of stretching required minimum distributions over their lifetimes. Instead, they must deplete the accounts within 10 years of the original owner’s death. This only applies to non-spouses which usually is the children of the account holder (spouses can roll inherited IRAs into their own accounts and delay RMDs until they’re 72). Inherited Roth IRAs must also be cleaned out within 10 years, but those distributions are tax-free. That means heirs could wait until the 10th year to deplete the account and enjoy nine years of tax-free growth.
That tax-free growth is like having Uncle Sam contribute to the Roth IRA at a rate equal to what it would have been taxed at.
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Todd Murphy
Latest posts by Todd Murphy (see all)
- Should I put my house in a trust? - July 26, 2023
