Understanding the Tax Consequences of Inheriting a Roth IRA

by | Oct 25, 2017 | With Your Family in Mind

 Some professionals are encouraging older individuals to convert their traditional IRAs to Roth IRA’s to pass to their beneficiaries at death. Passing down a Roth IRA can seem like a good idea, but it doesn’t always make the most sense. Before converting a traditional IRA into a Roth IRA to benefit your heirs, you should consider the tax consequences.
Leaving your heirs, a tax-free Roth IRA can be used as part of an estate plan. However, in figuring out the best type of IRA to leave your beneficiaries, you need to consider whether your beneficiary’s tax rate will be higher or lower than your tax rate when you fund the IRA. In general, if your beneficiary’s tax rate is higher than your tax rate, then you should leave your beneficiary a Roth IRA. Because the funds in a Roth IRA are taxed before they are put into the IRA, it makes sense to fund it when your tax rate is lower.
On the other hand, if your beneficiary’s tax rate is lower than your tax rate, a traditional IRA might make more sense. This way you will not pay the taxes at your higher rate. Instead, your beneficiary will pay at the lower tax rate.
Ms. MacDonald’s practice is limited to Estate Planning, Probate & Trust Administration. Ms. MacDonald maintains her practice in the Santa Clarita Valley at 25115 Avenue Stanford, Suite A-209 in Valencia, California. She can be reached at 661-294-6464.

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