Are You Making These Beneficiary Mistakes With Your Roth IRA?

December 9, 2016

 

In recent years, the Roth IRA has become one of the most popular retirement savings vehicles. In fact, more money is now contributed to Roth IRAs than to traditional IRAs on an annual basis. In 2013 more than $6 billion was contributed to Roth IRAs, while $4.6 billion went to traditional IRAs.1

 

It’s easy to see why the Roth IRA is so popular. While it shares some important similarities with the traditional IRA, there are also appealing distinctions. Both accounts offer tax-deferred growth as long as funds stay inside the IRA. However, the tax rules on contributions and distributions differ greatly.

 

With a traditional IRA, you may qualify for a deduction for your contributions. However, distributions are taxable. In a Roth IRA there is no upfront contribution deduction, but your distributions are tax-free after death, disability or attaining age 59½. That means you can use a Roth IRA to create a tax-free income stream in retirement or a tax-free legacy asset for your heirs.

 

 

Additionally, there are no mandatory distributions at age 70½ with Roth IRAs, which means you can accumulate tax-deferred growth as long as you like. For many, this makes the Roth IRA an ideal vehicle for funding late-in-life expenses or for passing assets on to heirs.

 

Of course, a Roth IRA can be used to pass assets to heirs only if you set up the beneficiary designation in the correct way. Although the process may seem simple, many people often make mistakes that cost their heirs money and even offset the many benefits of the Roth IRA. Below are three such mistakes. If these sound familiar to you, now may be the time to take action.

 

Not naming a contingent beneficiary.

 

Like most beneficiary-driven vehicles, the Roth IRA allows for one or multiple contingent beneficiaries who receive the assets in the event that your primary beneficiary is dead at the time you pass away. For example, assume your spouse is your beneficiary and predeceases you, but you never update the IRA. Upon your death, the assets would go to the contingent beneficiary.

 

Unfortunately, many people don’t name contingent beneficiaries. That can create a problem. If your primary beneficiary is dead and there are no contingent beneficiaries, your account balance is paid to your estate. That’s a taxable distribution, essentially nullifying all of the tax benefits that come with a Roth IRA. Make sure you have contingent beneficiaries on your account.

 

Not considering a nonspousal beneficiary.

 

Do you wish to leave assets to your kids, grandkids or other nonspousal loved ones? The Roth IRA could be a great vehicle to help you do so. If you leave your Roth IRA to your spouse, they have the option of assuming the account as their own.

 

However, a nonspousal beneficiary is required to take distributions within a short period of time. That may seem like a bad thing, but they also have the option of stretching those distributions over their life expectancy. The younger they are, the longer their life expectancy will be, meaning they can keep funds in the Roth IRA growing tax-deferred for an extended period of time. This stretch ability could help you provide a lifetime of tax-free income and tax-deferred growth for a grandchild or child.

 

Not talking to your beneficiaries.

 

Remember, beneficiary-driven vehicles aren’t governed by a will or the probate process. You can’t use a will to leave instructions for your Roth IRA beneficiaries with regard to that account. If your wish is for them to stretch the payments or use the funds for a specific purpose, you need to have that discussion with them. While they aren’t legally required to follow your instructions, they may be more inclined to do so if you discuss your goals and wishes with them.

 

Not sure if your IRA beneficiaries are set up correctly? Let’s talk about it. Contact us at Bridgeriver Advisors. We welcome the opportunity to review your accounts and needs, and then develop a strategy. Let’s connect today.

 

 

1http://money.usnews.com/money/blogs/planning-to-retire/2015/05/29/5-surprising-facts-about-iras

 

This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

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