An inherited Roth IRA is an excellent estate planning method for individuals who want to reduce inheritance taxes for heirs. Since account holders remit income tax at the time contributions are deposited into the account accrued funds are tax-exempt when gifted to beneficiaries.
Funds earned from the inherited Roth IRA through investments will be subject to inheritance tax if they exceed the amount of allowed exemptions. Beneficiaries that receive funds from this type of account should speak with a tax account to figure out if they ought to transfer proceeds to a new account or take a lump sum payment.
A number of alterations have been made to estate and death taxes, with additional changes planned for 2012. Roth IRA account holders ought to think about consulting with their estate planner to make certain contributions will remain protected against upcoming estate tax changes.
The longer IRA contributions remain in the account the more funds will be offered to beneficiaries. Contributions can significantly expand over the course of 30 or 40 years. When funds are retained for years on end, the greater the tax savings will be. Due to the fact that income tax is paid when contributions are deposited, beneficiaries only have to pay inheritance tax against proceeds earned.
Another advantage of setting up a Roth IRA is that account holders don’t have to withdraw funds once they reach a certain age. With traditional IRAs, funds have to be withdrawn when account holders become 70-1/2 years of age.
Additionally, account holders can continue making contributions into their Roth IRA for as long as they desire. This gives the opportunity to expand funds and pass on additional funds to beneficiaries. With traditional IRAs, account holders are forced to stop making contributions which lessens the amount of inheritance money that can be gifted.
Roth IRAs can be a robust investment option for setting up inherited wealth for minor children. With Roth IRAs, minor children can contribute a maximum of $5000 annually into their account. Contributions must be comprised of employment earnings.
However, adults can provide matching contributions up to the maximum allowable amount. If children contribute $5000 and receive matching contributions, the account will expand at the amount of $10,000 along with earned proceeds.
Since Roth IRAs are tax-sheltered retirement accounts, funds cannot be withdrawn until account holders reach retirement age. Just think about how much money would accumulate if an account is setup for children when they are 15 or 16 years of age.
The amount of maximum contributions is determined based on the account holder’s age at the time they establish the Roth IRA. People under the age of 50 can contribute a maximum of $5,000 per year, while people over 50 can contribute up to $6,000 annually.
It’s always best to consult with a financial planner to assure heirs receive the maximum amount of benefits from inherited Roth IRA accounts. Professionals can provide guidance about the smartest retirement planning methods that reduce tax liabilities and maximize inheritance cash provided to loved ones.