BEQUEATH THE BEST!
April 2005
A client asked me the other day, “What is the best asset I can leave to my heirs?” I immediately answered “A ROTH IRA.” You are probably aware of the income tax benefits of a ROTH IRA. You can contribute $4,000 into A ROTH IRA (another $500 if you will be at least age 50 by the end of the year), the funds grow tax free and, assuming you are age 59 ½ and the Roth account has been funded for at least five years, you can withdraw the funds without income tax consequences. As good as this sounds, your perception of ROTH IRAs is limited unless you consider the wealth building and estate planning advantages of a ROTH.
A Roth IRA differs from a traditional IRA in two key ways:
There are no minimum required distributions at age 70 1/2 so your funds can continue to grow until your demise.
Your beneficiary may take tax-free stretch distributions from your ROTH over their remaining life expectancies.
So any funds you can get into a ROTH IRA will grow without tax for the remainder of your life without the requirement of withdrawals and for the remaining life of your designated beneficiary. I will not bore you with numbers because it is plain to see the value of a ROTH IRA begun in your twenties and eventually left to your grandchild. Your ROTH IRA could potentially be earning tax free income for over 150 years. If you want to consider a specific situation, you can run scenarios on the ROTH IRA Contributions calculator on our website, www.CoverRossiter.com Leaving a ROTH IRA to a grandchild is as simple as naming that grandchild the designated beneficiary of the ROTH IRA.
So, now that you see the benefits, how can you get some funds into a ROTH IRA? Well, that is a tougher proposition. You can make a ROTH IRA contribution if your joint adjusted gross income is $160,000 or less and $110,000 or less if single. You can make a ROTH IRA contribution despite participation in an employer-provided plan (which you cannot do at the same income level to a conventional IRA). And, you can make a ROTH IRA contribution when you are older than 70 ½, which you cannot do with a traditional IRA. So, your best opportunity is when you are young or retired. During your high income years, you may be able to assist your children or parents by gifting the funds they contribute to their ROTH IRA.
There is another opportunity: to convert your traditional IRA to a ROTH IRA. You can do this if your income will be less than $100,000 this year. You may be able to do this if you are still working by shifting income and deductions between years so that income dips below the threshold in one of the years. If near retirement or retired, you can delay taking social security to keep your AGI under the cap. In general anyone 20 years away from taking distributions will save taxes by converting. The benefits increase if you can pay the taxes on the conversion from sources other than the IRA. You can analyze your specific situation by using the Roth IRA conversion calculator on our website, www.CoverRossiter.com.
Call Diane Burke at Cover & Rossiter (302-656-6632) for assistance with all of your retirement planning needs. Or, you can email us at CoverRossiter@CoverRossiter.com