Are you one of the millions of Americans using a Roth IRA as a retirement savings vehicle? The Roth IRA has officially become more popular than the traditional IRA. In 2013 more than $6 billion was contributed to Roth IRAs, compared with $4.61 billion for traditional IRAs.1
There are a number of reasons why the Roth IRA is so appealing to so many. While the Roth IRA doesn’t allow for deductions for contributions like the traditional IRA, it does offer other tax benefits. Growth is tax-deferred in the Roth, just as it is in the traditional. Also, distributions from a Roth IRA are tax-free as long as you are either disabled or over age 59½.
Distributions from a Roth IRA are also tax-free if you are deceased. That means your beneficiaries can receive both your Roth IRA contributions and growth without facing any income taxes. For many, that makes the Roth IRA an attractive vehicle for passing assets on to loved ones.
Of course, there is always the question of whom you should name as your beneficiary. This is an important decision, as it usually can’t be challenged or changed after you die. If you forget to update your beneficiary or fail to name one, it could have big consequences for your loved ones.
If no beneficiary is listed, or if the primary beneficiary is dead and there are no contingent beneficiaries, the Roth IRA balance is paid to your estate. That’s a taxable distribution, thus canceling out all the tax benefits of using the account in the first place.
Take some time to think about who your beneficiary should be. Many people choose either their spouse or another loved one, like a child or grandchild. You can also name multiple beneficiaries if you would like to split the assets among several people. Below are some facts about how the death benefit is handled depending on whom you name:
Spouse as Beneficiary
For many people, it’s just common sense to name their spouse as their primary beneficiary. After all, it’s probably important to you that he or she has enough assets to live comfortably after you’re gone.
If you leave your Roth to your spouse, they have a number of options. They can take the money as a tax-free lump sum, but doing so would eliminate any potential tax-advantaged growth in the future. They can start taking tax-free income from the account, too. They also have the ability to assume the account as their own, deferring distributions and letting the assets grow tax-deferred as long as they’d like.
Nonspouse as Beneficiary
You also may be thinking about naming a nonspouse loved one, such as a child or grandchild, as a beneficiary. There are advantages to this, too, although the distribution rules are slightly different.
Nonspouse beneficiaries can take the assets as a tax-free lump sum. They also have the option of keeping the assets in the Roth account, although they are required to start taking distributions fairly soon after your death. They can’t leave the funds in the account growing tax-deferred indefinitely.
However, they also have an intriguing third option. Nonspouse beneficiaries can do a “stretch” option, in which they take tax-free distributions based on their life expectancy. If the beneficiary is young, they will have a long life expectancy, which will result in lower distribution amounts. That means more money can stay in the account, growing tax-deferred for a long period of time. The stretch option is a way to give your child or grandchild a lifelong tax-free income stream.
Not sure who your beneficiary should be? Let’s talk about it. We welcome the opportunity to help you analyze your goals and needs, and then develop a plan. Let’s connect today.
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.
16238 - 2016/11/15