Ask Money

Estate planning and the Roth

Chris Farrell Feb 4, 2011

Question: If I do not redeem my Roth and leave it to my estate, what are the consequences to my children? Can they keep it as their Roth? Can it become taxable to them? Can we pass it on? Gene, Oklahoma City, OK

Answer: When it comes to estate planning the Roth ranks among the best of the retirement savings plans. The reason: You don’t have to take the money out during your lifetime. Unlike a traditional IRA, there is no required minimum distribution at age 70 ½. The money in the account gets to compound longer.

What happens when you die? Little is ever simple in the IRA world. So before you do anything my main recommendation is to work with a professional to set up your estate and talk to your children about their Roth options. In essence, your children will have to take the money out during their lifetime, tax-free and penalty-free.

Here’s a simple outline of the major points involving a Roth and your beneficiaries. That said, you won’t be surprised to hear that all kinds of twists and turns with the Roth. It’s part of the U.S. tax code, after all!

The Roth has to have existed for at least 5 years before earnings can be withdrawn tax free. It sounds as if yours is already set up so that rule isn’t a hurdle. When you die the Roth is considered part of your estate, byt estate taxes aren’t an issue for most people. If the beneficiary is your spouse it’s simply treated as if it is hers.

Now, if your children are the beneficiaries they have to make a choice. They can elect to receive the entire sum from the Roth by December 31st of the fifth year following your death. Or they can decide to receive distributions over their life expectancy (allowing the money to compound longer). They must choose the latter option by December 31 of the year following your death. Otherwise, they’ll get the lump sum distribution.

Like I said, you should run everything by a professional, as well as the rest of your estate plan. I would also talk through the options with your children.

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