2 Tips for Maximizing Your Roth IRA Legacy

Have you used a Roth IRA as a savings vehicle to accumulate assets for retirement? If so, you’re not alone. In recent years, the Roth IRA has become an especially popular savings tool, primarily because of its unique tax advantages.

With a traditional IRA, you get a tax deduction for contributions and tax deferral on growth in the account. All distributions are taxable, though. In a Roth, there are no deductions for contributions, but growth is still tax-deferred and distributions after age 59½ are tax-free. That means you can use a Roth to generate a tax-free income stream in retirement.

The Roth IRA also has estate planning advantages. Unlike with a traditional IRA, you aren’t forced to take distributions from a Roth at age 70½. In fact, you can keep your funds in the Roth IRA growing tax-deferred as long as you like. When you pass away, your beneficiaries can receive the Roth assets tax-free and probate-free.

While the process of passing Roth assets on to loved ones is fairly simple, there are a few things you can do to make sure you maximize your legacy. There are also simple mistakes that can result in your beneficiaries receiving fewer assets. Below are a few tips to help you maximize your Roth IRA legacy:


Name contingent beneficiaries.

The Roth IRA is a beneficiary-driven vehicle. That means that when you die, it isn’t governed by your will or other estate planning documents. Rather, the distribution of the Roth is guided by whom you’ve named as beneficiary. The funds will go to the primary beneficiaries upon your death. However, if the primary beneficiary is also deceased, the funds will go to your contingent beneficiary.

If you don’t have a contingent beneficiary listed, this could create a substantial problem. With no primary or contingent beneficiary in place, the Roth IRA will be distributed to your estate. That’s a taxable distribution, eliminating all the tax advantages of the account. Also, the assets will go through probate, which doesn’t happen if there is a beneficiary listed.

Make sure your Roth has a contingent beneficiary. It’s not uncommon for a primary beneficiary to die and for the account holder to forget to make a change. Also, if your primary beneficiary is your spouse, it’s possible that you could die together in an accident. Without a contingent, your loved ones may face a complicated process to collect your Roth assets.


Consider a younger, nonspousal beneficiary.

Do you want to leave money to a child or grandchild? If so, you may want to make them the beneficiary on your Roth. That’s because the Roth rules allow a nonspousal beneficiary to stretch distributions over their lifetime.

Should your beneficiary choose the stretch option, they will receive annual tax-free distributions based on their life expectancy. The longer their life expectancy, the lower the annual payment. That means more money stays in the Roth and continues to grow tax-deferred.

Using this strategy, you could create a tax-free, growing lifetime income stream for your loved ones. Just make sure you discuss the strategy with them in advance so they understand your wishes. There’s nothing that legally requires them to choose the stretch option, but if you discuss it ahead of time, they may be more inclined to do so.

Ready to plan your Roth IRA legacy? Let’s talk about it. Contact us at Lighthouse Financial. We welcome the opportunity to help you evaluate your goals and develop a strategy. Let’s connect soon and start the conversation.


Global Financial Private Capital (GFPC) and GF Investment Services (GFIS) have no affiliation with the news agencies represented here and the views expressed do not necessarily reflect the views of GFPC or GFIS. GFPC and GFIS make no representations or warranties about the accuracy, reliability, completeness or timeliness of the content and do not recommend or endorse any specific information contained therein.

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16238 – 2016/11/15

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