Each one of us has a limited amount of time on this planet. When that time is up, it’s comforting to know that we can still help take care of the surviving members of our families with our estate. But the estate we leave behind doesn’t come from nowhere; instead, it can take years of careful planning and savvy investing to build, and equally careful planning to execute for maximum impact.
When helping a client with their estate planning, it’s important to look at all avenues for creating a legacy that meets their vision and values. One such road to visit is a Roth IRA. Here, we’ll explain when and how to use Roth IRAs in estate planning, and why they may be a good idea, so you can guide your clients and their families down the right path.
Tax and Distribution Benefits of a Roth IRA
After-tax money is put into a Roth IRA, so when it’s withdrawn, a qualified withdrawal is generally tax-free, barring certain unique scenarios. So, when you evaluate the balance in a Roth IRA with your client, what you see will be a fairly accurate representation of what the account owner actually has available for recipients to receive. That could make it easier when planning any distributions. Speaking of which…
Required Minimum Distributions (RMDs)
Unlike a traditional IRA, RMD rules do not apply to a Roth IRA.1 This means the money can stay in the account and grow until it is truly needed. Couple this with the fact that distributions aren’t generally taxed, and your client may be looking at a sizable estate for their survivors when they may need it most.
Beneficiary and Withdrawal Rules
An individual may withdraw from their Roth IRA after five years of contributions and after age 59 ½.2 One exception, however, is for those who are the named beneficiary of a deceased owner of a Roth IRA account.2
If a Roth IRA account owner wants a smooth transition of payables to their survivors, they’ll need to choose specific beneficiaries to receive those payments after the account owner passes away.
In most cases, the entire interest in the Roth IRA must be distributed by the end of the fifth or 10th calendar year after the year of the Roth IRA owner’s death, unless the interest is payable to an eligible designated beneficiary who elects distribution over their life or life expectancy.2
If the beneficiary is the surviving spouse of the original Roth IRA account owner, they have full flexibility to comply with distribution requirements as a beneficiary and they can exercise their spousal option to treat the Roth IRA as their own at any time.2
Planning with Roth IRAs
When conducting estate planning, setting up the beneficiaries and having everyone on the same page as to how the Roth IRA will pay out in the event of the account owner’s death is paramount.
If your client intends to use a Roth IRA for themselves and/or their survivors, be sure that all beneficiary information is up to date. Go over everything with them so there are no surprises.
It’s also wise for you to keep current on any updates made to the laws, particularly what’s referred to as the SECURE Act (Setting Every Community Up for Retirement Enhancement), which is, as of this writing, still being finalized for procedural guidance and possible updates, while another legislative package commonly known as Secure Act 2.0 makes its way through Congress.3 Such regulatory changes could affect payouts and timelines, so it’s important to remain tuned in to these congressional developments.
Help Clients Find Clarity in the Complicated
With so many rules and timelines to watch out for, it can understandably get confusing for some clients to keep everything in order for a smooth transition in their later phases of life. As an advisor, they’re looking to you as a beacon amid the occasional choppy waters of financial planning. That’s why we want to help you provide simplicity for complex situations.
We’ve gathered advanced planning resources that we call Elevate™. Curated resources for relevant financial topics, including income planning, rollover opportunities, legacy planning and more are at your fingertips. Click the link below to learn more.
Written by: Marshall Heitzman, CFP®, ChFC, FLMI, CPCU, BFA™
Marshall is a VP - Advanced Planning Consultant with CUNA Mutual Group and has more than 25 years of experience in the insurance and financial services industry. He consults Financial Advisors on advanced retirement planning concepts for retirement and wealth management clients.
1Internal Revenue Service, Retirement Topics — Required Minimum Distributions (RMDs), May 3, 2021
2Internal Revenue Service, Publication 590-B (2020), Distributions from Individual Retirement Arrangements (IRAs), May 25, 2021
3CNBC, House passes ‘Secure Act 2.0.’ Here’s what that means for retirement savings, March 30, 2022