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Estate Planning with Roth IRAs

Traditional Individual Retirement Accounts (IRA) may cause an income tax problem at death of the owner, if there is no spouse to pass it on to as the named beneficiary or a named beneficiary that is alive.What I am discussing in this article is a way of using a Roth IRA as a vehicle to pass on those dollars to your heirs, should you believe that you will not need the dollars during retirement.What is the benefit to you? In converting the traditional IRA, you are not bound by the “Required Minimum Distribution (RMD) Rules” imposed by the IRS. Your converted account could potentially grow, adding tax-free dollars to your estate. On the other hand, should you decide to take distributions from the Roth IRA, distributions do not affect Social Security income for seniors.The risk: The first is that you planned well and do not need the dollars during retirement. The second is that the rules do not change between then and now for this to be a cost effective planning tool.Death and taxes – sound familiar? If you were to convert your traditional IRA to a Roth, you will pay income tax on the converted amount. If you have a large IRA, you can convert this over a period of years and work with your tax advisor to keep your taxes manageable. The pre-paying of income taxes from a taxable account assists the beneficiary and the taxable estate by the amount of the taxes paid.Beneficiaries will not owe any income taxes on the withdrawals they take from the inherited Roth IRA; however, there may be RMD requirements they need to meet. Even with the RMD, the heirs can take dollars over many years, leaving the corpus to continue to grow tax advantaged.Will this work in real life? Let us take an example of a 70 -year-old male who converts his traditional IRA and pays the income taxes on the conversion. He lives for another eight years, when his wife inherits the Roth IRA. As there is no RMD on the Roth for the wife, she could leave the money in the account for her 55-year-old son, and any growth on these assets will continue to accumulate tax-free. The widow dies eight years after inheriting the Roth and it passes onto the now 63-year-old son.The son’s life expectancy is another 23 years. During that time, the son has to take out a minimum distribution every year and he takes only that – the minimum. The remainder of the dollars could continue to grow tax free inside of the Roth. The son’s wife is his named beneficiary and upon his death, she takes off on a world cruise with all that tax-free money she inherited from her father-in-law by way of her husband’s family. Just checking to see if you are still reading or if you gave up a long time ago! Eight years with the father, eight years with the mother and 23 years with the son equals 39 years of tax free growth potential.This type of planning is auxiliary to a good estate plan and should be reviewed by a professional who understands long term estate planning and the tax consequences that go along with it.For more information, visit www.alexdonnell1.sarep.comDonnell Services, LLC, Securities America, Inc and Securities America Advisors are independent companies.*Actual results will vary depending upon ages of the respective beneficiaries.Donnell Services, LLC719-886-3377Registered RepresentativeSecurities America, Inc. &Securities America AdvisorsMember NASD, SIPCFor more information, visit www.alexdonnell1.sarep.com.Donnell Services, LLC, Securities America, Inc. and Securities America Advisors are independent companies.

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