Roth IRA Estate Planning Strategies

By Wilson Ziegler, Staff Writer

Most people are very well aware of the benefits of building a retirement nest egg using a Roth IRA. One of the less well aspects of a Roth IRA is how it can be used for estate planning. This is probably on account of the fact that most of us intend to use the IRA as a source of post retirement income, so the question of passing on the IRA to your heirs is secondary. It is, however, an important part of estate planning.

Let's assume that you do want to pass on the IRA to your heirs, and not to the IRS. In this article, we discuss estate planning strategies for a Roth IRA to help the inheritors of your Roth IRA from being hit with massive income tax liabilities upon withdrawal.

With a traditional IRA, you are straitjacketed by the necessity of initiating withdrawals after age 70 ½ and accompanying withdrawal taxes. With a Roth IRA having no such withdrawal deadline, you have the option of continuing to pad the IRA with tax free dollars. If you have a traditional IRA, and decide you do not need the funds post retirement, you have the option of converting it into a Roth IRA. You would still need to pay tax on earnings and tax deductible contributions, but if you pay the taxes using other resources, and convert to a Roth IRA, what your heirs get is essentially a tax free inheritance.


If your heirs don't need the money immediately, they have the option of accepting payouts over an extended period, with the remaining balance in the account accumulating tax free. This strategy extends the tax benefits of a Roth IRA across generations, helping a family to leave an IRA virtually untouched, except for withdrawal checks issued to the heir, for over 50 years.

The IRS has no problems with this arrangement. In fact, they have lent a helping hand by not including the minimum withdrawals accepted by an IRA holder for calculating the $100,000 AGI eligibility requirement for being able to convert a traditional IRA into a Roth.

Thus, while you still have to pay for the conversion, and assume that neither you, your spouse upon your death, or your heir upon the death of both spouses, will be in immediate need of the full amount in the IRA. These conditions being fulfilled, and tax laws governing IRAs remaining as they are, what you leave behind for your heirs is a stream of annuity payments coming out of the compulsory withdrawals, while a major part of the accumulated funds in the IRA remain safe and tax free.