Therefore, a Roth IRA is received free of income tax by the person who inherits the account, but a Roth account may be subject to estate taxes. With a Roth, income tax is pre-paid on the contribution and the earnings are not taxable. To learn more about inheritance issues and to explore estate planning techniques visit.
Inheritance Planning : Would you rather pay the taxes on your retirement account assets, or have your beneficiaries pay the taxes on the assets? Since the taxes are not due until the money is withdrawn from a traditional retirement account, the beneficiaries who inherit the funds pay the tax. A Roth account allows more flexibility for financial planning options. Perhaps you anticipate needing the funds as you age for medical expenses, or you would like to provide an inheritance for your children. If you are not necessarily “average” – because your grandma lived to be 102, or you plan to continue working well beyond the normal retirement dates – the Roth may give you more options for planning your income disbursements. RMDs are based on the average life expectancy on actuarial charts.
You decide when to take the money out and how much to withdraw, provided you are at least 59 ½ and the money has been in the Roth for at least five years. Traditional retirement accounts require you to begin Required Minimum Distributions (RMD) when you reach age 70 ½, whether you need the money or not. A significant advantage of a Roth retirement account is in retirement income planning.
Retirement Income Planning : So much attention is paid to the tax differences between the Roth and traditional retirement accounts that the other advantages are rarely mentioned. If you expect your effective tax rate to be higher in the future because of higher income or higher tax rates, then a Roth contribution, or a Roth conversion, may be something to consider. In addition, many experts forecast tax rates will increase because of the exploding federal deficit and the possible expiration of the tax cuts enacted in 2001.
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Your effective tax rate is often lowest when you have a house full of kids, deductible education expenses and a large mortgage. With fewer personal exemptions and deductions, taxable income can increase. However, income earned is only a part of the taxable equation. It would seem logical if you make less money, then your tax rate is lower too. Often people make less money in retirement. Sounding a little like a pay me now or pay me later argument, with little difference in the Roth and traditional options? The key is predicting whether your tax rate will be lower now or in the future.
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