Do you want an investment account that grows without tax and also provide tax free distributions? And are you interested to pass on this type of investment to your beneficiary or your heirs? Yes, of course. You can do it with a Roth IRA.
Anything invested in your Roth IRA grows tax-free. No Roth IRA penalties apply to a Roth IRA withdrawal (taking for granted that it is a qualifying distribution). And you don't have to take anything out of the account as long as you live. A great savings mechanism!
The chart below displays how such an investment would increase using two hypothetical annual rates. You may notice that even at a rate of 5% it doubles in less than 15 years.
You can transfer your Roth IRA directly to your selected IRA beneficiary at the time of your death. Or you can elect your spouse to receive it before everybody else. She gets the right over the amount if she acquires it and then it's up to her whether she wants to use it or pass it on to her designated recipient.
When the recipient gets it from you or your partner at the time of her death, it's necessary for the beneficiary to make annual Roth IRA withdrawals based on his lifespan at the age he receives it. But anything left in the Roth IRA grows free of tax and the withdrawals from Roth IRAs will also be tax-free. Should the beneficiary fail to take distributions, the Roth IRA penalties are significant.
Let's consider how much tax-free investment growth may take place before the beneficiary receives it. Let's say, you are 65 with a Roth IRA of $100,000. IRS life expectancy adds another 21 years to it. But if you manage to live for only 10 more years, the graph shows you how your Roth IRA will increase.
If you designated your spouse as beneficiary, she could title it as her own at your death and let it grow without taking Roth IRA withdrawals for herself, as spouses are exempt for required distributions. Now, if she lives 10 years after you, her chosen beneficiary would obtain 20 years more of growth– and that is a big increase according to the graph.
Finally, that recipient may be only 55 years old at that time of inheritance with a life expectancy of 30 years. While he will need to take small annual withdrawals (with large Roth IRA penalties if withdrawals are missed), the bulk of the account continues to grow tax free.
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions