Your IRA as a Financial Legacy
IRAs are designed primarily to help provide you with a tax-advantaged way to invest for retirement. But did you know that if you’re fortunate enough to have more retirement investments than you’ll need, an IRA can be an effective means for leaving your heirs a tax-advantaged financial legacy?
Two IRA options
With a traditional IRA, your contributions and account earnings grow tax deferred until you withdraw them. Contributions may be tax deductible if you meet IRS rules. But you can’t leave your money in the IRA forever. You must begin taking annual required minimum distributions (RMDs) — determined using an IRS table — from your traditional IRA by April 1 of the year after the year you turn age 70½. If you don’t take these RMDs, you may incur a tax penalty on the amount you were required to take but didn’t.
With a Roth IRA, you make nondeductible contributions,* and those contributions and earnings may potentially grow tax deferred in the IRA. Once you’ve owned a Roth IRA for five tax years and are age 59½ or older, or become disabled or die, withdrawals from your Roth IRA are income-tax free. After five tax years, you can also make tax-free withdrawals for an eligible first-time home purchase (limits apply).
Unlike with a traditional IRA, you aren’t required to take any distributions from a Roth IRA during your lifetime. However, your Roth IRA beneficiaries will be subject to RMD rules following your death. So a Roth IRA can potentially grow tax deferred longer than a traditional IRA, allowing you to leave a greater — and potentially income-tax-free — legacy.
Structuring your legacy
You may be able to designate beneficiaries in a way so that when they inherit your IRA they could pay lower RMDs than you had to pay during your lifetime. You’ll also give them the opportunity to keep the IRA assets invested on a tax-deferred basis longer. For example, if you’re certain your spouse won’t need your IRA money, you might name your child or grandchild as beneficiary, so RMDs will be based on his or her longer life expectancy. An estate planning attorney can look at your situation and advise you of the best approach for your situation and under the laws of your state. Also, talk with your financial professional, who can give you more information about IRAs and other financial products that can benefit you and your family.
* There are income restrictions on Roth IRA contributions.