Your Roth IRA beneficiary decision has to be considered very carefully. That’s because IRA beneficiary rules are very specific to the IRA and also because a Roth is a very different animal than a traditional IRA.
The real power of a Roth IRA comes over time. The longer you keep the Roth (rather than spend it), the more powerful it becomes (as compared to the regular IRA).
Remember, if you select a Roth over a regular IRA, you don’t get an immediate tax deduction. Instead, you get tax-free growth and withdrawals. If you take a “normal” IRA and convert it, you also have to consider the IRA Roth conversion tax. So you need lots of tax-free growth and withdrawals in order to make up for that deduction you forgo.
The people who really super-charge the Roth are those who don’t even need or want to take any withdrawals from their account. These folks pass the Roth on to their heirs and let them continue the tax-free growth and withdrawals for years and years and years. That being the case, the best beneficiary of your Roth is the youngest beneficiary.
Well…if you have a Roth and your beneficiary inherits the account, they will be forced to make withdrawals (even though they are tax-free) based on their age. The younger the beneficiary, the lower the required withdrawal. The lower the withdrawal, the longer the money lasts. The longer the money lasts, the greater the benefit of tax-free growth. This is a wonderful family continuation plan.
So all things being equal, if you or your spouse don’t need the money in the Roth, name a very young beneficiary – like a grandchild.
If you opened a Roth IRA account, how did you select your beneficiaries?
OK…on to your weekend reading assignments:
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