You’ve heard from us the benefits of Roth IRA. If your income (or your spouse’s income) qualifies you to contribute to one, it’s a great tool for your retirement! Paying historically low tax rates today, knowing that regardless of the tax rates or your tax bracket in the future, you’ll never have to pay taxes on the contributions and earnings in your Roth IRA again, is a huge benefit. Depending on your income and your extra cash on hand, it can make sense to do Roth conversions in your pre-RMD years. And our advisors often recommend contributing to your Roth 401k if that is an option at work.

Roth IRAs are also a wonderful thing to pass down to your children and other younger heirs. Effective 2020, inherited retirement accounts like 401(k)s and IRAs typically have to be depleted by non-spouse heirs, with some limited exceptions, within 10 years of inheritance. Distributions from an inherited traditional IRA (aka ‘Beneficiary IRA’) can push heirs into a higher tax bracket. Even worse, minors or dependent college students who inherit traditional IRAs can be subject to the kiddie tax, which means that everything is taxed at their parent’s highest tax rate. But distributions from an inherited Roth IRA (aka ‘Beneficiary Roth IRA’) are tax-free to heirs! 

While many of us save and invest for retirement so that we can enjoy the fruits of our labors and savings during our golden years, not necessarily with the goal to pass down a legacy, it’s good to keep in mind that Roth IRAs can help minimize and hedge against future taxes for both you and your heirs.

Posted in Estate, Retirement, Taxes

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