Inherited Roth IRA
Even though an inherited Roth IRA is subject to tax levies when transferred to beneficiaries, it can be a smart approach for keeping financial assets out of probate. Account holders pay taxes when they make deposits into the IRA, but fund might be subjected to estate tax if they exceed allowable exemptions.
When heirs acquire an inherited Roth IRA it's best to retain the services of a tax accountant. Rules surrounding estate tax has changed over the past three years, with additional changes planned for 2012.
Roth IRAs are a good choice for those who want to maximize opportunities to reduce taxes. When contributions are made into Roth IRAs the account holder pays taxes upfront. This makes the accrued funds non-taxable at the time of withdrawal.
Since taxes are paid at the time of contribution, heirs can save substantial amount of money if Roth IRAs are held for several years. A tax accountant explained the potential savings as a 'dollar for ten dollars' theory.
Since money can grow significantly while safeguarded in the IRA, the tax savings could amount to 10 times the actual tax. For example, for every $100 contribution the account holder is charged 5 percent tax. He holds the account for 20 years. During this time the tax rate has increased to 50 percent. Heirs would essentially save 45 percent in taxes because IRA contributions were taxed at a much lower tax rate years prior.
Another benefit of Roth IRAs is there is no predetermined time when funds must be withdrawn. With traditional IRAs account holders are required to withdraw money when the turn 70-1/2 years of age.
Additionally, account holders can continue to deposit funds for as long as they like. This lets contributions expand and supply additional money to heirs. With traditional IRAs, account holders must cease distributions which minimize the amount of inheritance money available to heirs.
Roth IRAs are an exceptional choice for setting up inherited wealth for children. One of the best examples I ever read about this strategy was presented by William Baldwin of Forbes magazine.
Essentially, children under age 18 are permitted to make monetary contributions of up to $5000 annually into a Roth IRA. Funds must be derived from employment; however children are allowed to receive matching donations up to the full amount.
Since Roth IRAs are tax-sheltered retirement accounts the money cannot be withdrawn until the children reach retirement age. Imagine how much money can be sheltered through tax savings when cash sits for 50 years or longer.
Maximum contributions into Roth IRAs vary by the account holder's age at the time the IRA is setup. People who are under 50 when they establish their IRA can make a maximum annual contribution of $5000, while people over 50 are allowed to contribute as much as $6000.
Certain eligibility criterion must be met before individuals are authorized to open a Roth IRA account. There are restrictions surrounding gross income requirements that apply according to marital status and the way tax returns are filed.
A final consideration of Roth IRAs is establishing beneficiaries. The process to bequeath an inherited IRA involves providing an assigned beneficiary form to the bank. Roth IRAs are exempt from probate and do not have to be included as an asset in the last will and testament.
To assure loved ones receive maximum benefits from an inherited Roth IRA it is vital to obtain professional advice from a probate attorney or tax accountant. We provide an extensive retirement planning article library to help you learn about available options and ways to protect inheritance property.
Published on September 05, 2011 at 03:29 AM