An inherited Roth IRA is a good estate planning strategy for people that want to lessen tax burdens for heirs. The account holder pays income tax when contributions are made; making funds tax-exempt when passed along to beneficiaries.
Proceeds earned from an inherited Roth IRA are subject to inheritance tax when they surpass allowable exemptions. It’s advisable for beneficiaries to obtain counsel from a tax accountant to determine if they should transfer money into a newly established account or accept lump sum cash.
Several changes have taken place regarding estate and death tax, with more changes taking place in 2012. Account holders may also want to consider talking with their estate planner to ensure funds are protected against forthcoming legislation.
It only makes sense that the longer contributions are placed into a Roth IRA account the more money will be available for beneficiaries. One simple way to illustrate how funds can accumulate was presented by a financial advisor I once knew. He referred to the method as creating ten dollars out of one dollar.
Contributions to IRA accounts can substantially expand over the course of time. When funds are secured for 20 or 30 years, the tax savings could easily amount to as much as ten times more than the original taxable amount.
For demonstration purposes let’s say the tax rate was 5 percent at the time the account was opened. For every $100 contribution, $5 is paid in taxes. Twenty years later, the tax rate has increased to 25 percent and for $100 contributions a tax amount of $25 is assessed.
Since the taxes were paid at the time of contribution, beneficiaries are only responsible for inheritance taxes against earned income, not the contribution amount. Using the example above, this saved them 20 percent in income taxes alone.
One benefit of Roth IRAs that is attractive to most people is that contributions don’t have to be withdrawn at a certain age. Traditional IRAs require account holders to take out their money at age 70-1/2.
Furthermore, account holders can keep on contributing to the Roth IRA for as long as they want. This provides the option to increase available funds and pass along more money to heirs. With traditional IRAs, account holders have to cease making contributions which decreases the amount of inheritance cash that can be gifted.
Roth IRAs are a great investment product for establishing inherited wealth for minor-aged children. William Baldwin provided a good example of how powerful this strategy can be in an article published via Forbes magazine.
Children under the age of 18 are allowed to set aside up to $5000 per year in a Roth IRA. Contributions need to be earned through employment, but other people can match contributions up to the maximum amount. If parents contributed an additional $5000, this account could grow at the rate of $10,000 per year, plus earned proceeds.
Due to the fact that Roth IRAs are tax-sheltered retirement accounts, the money cannot be taken out until account holders reach retirement age. Think about the amount of money that would accumulate over the course of 50 to 60 years, or more.
When setting up a Roth IRA the amount of allowable annual contributions are established according to the account holder’s age. Individuals under 50 years of age have a maximum contribution of $5,000 annually, while those over 50 can make yearly contributions of up to $6,000.
Working with financial advisors will help ensure that beneficiaries receive the highest level of benefits from inherited Roth IRAs. These professionals can help people decide the best retirement planning strategies that will limit tax liabilities and provide more inheritance money to loved ones.