Tuesday, March 08, 2005

IRAs: Part 2

Roth IRAs: Sheltering Your Assets & Preparing for the Tax Man

There are many estate preservation benefits that come with the Roth IRA. By placing assets that you wouldn't need in your lifetime into a Roth IRA, you could be building up a healthy inheritance for your children, free of income taxes. Under traditional IRA rules, you would have to start making minimum withdrawals as soon as you turn 70 1/2, which could quickly deplete your account. But with the Roth IRA, you aren't required to withdraw money during your lifetime. And while the value of the Roth IRA will be subject to estate taxes, your heirs wouldn't have to pay income tax on the money as they withdraw it over their single life expectancy.

Under new Roth legislation, your heirs may have a longer time to withdraw the money you've left for them, leaving the money in the account to compound tax-free.

With the traditional IRA, the payout schedule would have been based on your life expectancy. But with the Roth IRA, if you decide to bequeath it to your heir, the distribution schedule is based solely on your heir's life expectancy — which means if your heir inherited the account at age 30, and lived to age 86, he or she would be entitled to withdraw money from the Roth for the next 56 years.

If your heirs chose to leave assets in the Roth IRA, the tax-free compounding can lead to greater assets than if the money had stayed in a traditional IRA.

If you're still worried about paying taxes on a conversion, think of it as a way to reduce estate taxes. By paying the money upfront in taxes, you're reducing your taxable estate. And if your estate is over the estate-tax exemption, there are other options that you might want to try, like life insurance--which will enable heirs to keep assets in their inherited Roth IRA intact by using that money instead to pay estate taxes.

As a nest egg for your future or as a guarantee for someone else's, the Roth is a flexible EP tool everyone should weigh out.

source: NYL

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