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With the upcoming holiday rapidly approaching, we should all start thinking about what we’re thankful for. You know, just in case someone at the dinner table puts us on the spot.
Here’s what I’m going to say if anyone asks:
“I’m thankful for my daughter Vela. I’m thankful that my vegetarian wife let me cook some turkey legs. Oh, and I’m thankful for Roth IRAs, too.”
I’ve previously told you about the beauty of Roth IRAs here in Money and Markets.
To quickly recap: They give most working Americans the ability to sock away money, watch it grow, and never have to pay another cent in taxes on any of the funds as long as certain conditions are met.
And unlike regular IRA accounts — which are taxed at withdrawal time — you do not have to begin taking minimum distributions at age 70 ½.
In fact, so long as you have earned income (or alimony) you can continue making contributions for the rest of your life.
And here is perhaps the best feature of Roth IRAs, one that I rarely hear mentioned (even by financial professionals) …
You Can Use a Roth IRA to Pass
Along Massive Wealth to Your Heirs
Let me explain how it works …
Because you are not required to take minimum distributions, you can leave every single penny of your Roth IRA intact for your designated beneficiary. That’s great.
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Even better is the fact that your heir will face a choice upon your death: Either withdraw the whole amount by December 31 of the fifth year after your death OR begin receiving minimum distributions based on his or her life expectancy.
Under either choice, all the proceeds should be tax-free (with the exception of estate taxes).
Here’s an example:
Say you leave your Roth IRA to your son who is 53 at the time of your death.
If your son decides to take minimum distributions, the IRS will use its actuarial tables (available in IRS pub. 590) to figure out roughly how long your son is likely to live.
Then the IRS will divide the value of your account by that number (31.4 in 2008) to arrive at a dollar amount for yearly distribution.
In the case of a $100,000 portfolio, your son would have to withdraw $3,289 in 2009 ($100,000/30.4).
Important: While your son is taking those minimum distributions, the value of his inherited investment account can continue to rise!
I’m sure you can see the appeal of this approach, especially since you’re well aware of the effect of compounding.
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| A Roth IRA is a great way to pass along wealth to your heirs! |
Think about what would happen if you loaded up that Roth IRA with stocks that steadily increase their dividends. And imagine what would happen if you were reinvesting those dividends back into more shares!
You’d be combining complete tax efficiency with multiple layers of compounding interest. Heck, with enough time, you could leave behind a nest egg that was rising faster than the rate of your heir’s mandatory withdrawals!
That brings me to another point. While this strategy would be great for a son or daughter, it would be even better for a grandchild or a great-grandchild.
After all, those minimum distributions are calculated on the recipient’s age. The lower the number, the less money coming out every year and thus the longer the account can grow.
Obviously, the lynchpin in this whole plan is absolute agreement on the part of the original account owner and the beneficiary on opting for taking the minimum distribution route.
But if you have an heir you can count on, I consider this one of the smartest moves you can possibly make.
If you’re eligible for a Roth IRA, take advantage. And even if most of your money is currently in a regular IRA account, it may very well be worth your while to roll it into a Roth.
Although you’ll take a big tax hit in the process, if your goal is leaving that money to someone far younger, the Roth could still prove the smarter wealth builder over the long haul. That’s definitely something to be thankful for!
Best wishes,
Nilus
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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