When choosing the right retirement plan, many people consider Roth IRAs because they provide a lot of tax benefits. However, what’s not often is known is that Roth IRAs are also excellent tools to help families avoid probate.
Before we get into the probate benefits of Roth IRAs, let’s take a quick look at the basics of these retirement accounts:
- Contributions to a Roth IRA are not tax-deductible, which sets them apart from other retirement accounts.
- You are not taxed on qualified distributions, which are distributions made if you are at least 59 ½ or if the account has been open for more than 5 years.
- Your contributions are not taxed when they are withdrawn, giving you bigger benefits if you save for a longer amount of time.
- There are no required minimum withdrawals with a Roth IRA.
No required minimum withdrawals = avoiding probate
If you decide to let your savings accumulate tax-free in a Roth IRA over a long period of time without taking the minimum withdrawals, you will most likely have a significant amount of money in that account by the time you pass away. The account will then pass to the beneficiary you named on the account. Since you named a beneficiary, the assets in the Roth IRA will not have to go through the probate process like your other solely-owned assets.
Name a beneficiary to your Roth IRA
The only way your Roth IRA will avoid probate is if you have a valid beneficiary, which is why you should always make sure that your beneficiary designations are up to date. For example, if your spouse was named as the beneficiary of your Roth IRA and passes away before you, the Roth IRA will become part of your probate estate if you do not name any replacement beneficiaries.
Keep in mind though that there are some limitations to Roth IRAs. As of 2021, individuals under 50 can only contribute up to $6,000 a year into their Roth IRAs, while people 50 and over can contribute $7,000 a year. In addition, you may only contribute to a Roth IRA if your income is below a threshold of between $125,000 and $140,000 for single filers and between $198,000 and $208,000 for married filers. The amounts you are allowed to contribute decrease as you move further up the threshold.
You may also be subject to income taxes and early distribution taxes if you make withdrawals before you turn 59 ½ or before the Roth IRA is 5 years old. However, even if you don’t meet these qualifications, you may still be eligible for a tax-free distribution if you make the withdrawal to pay for your first home or if you need the money because of a disability.
If you have any additional questions about using a Roth IRA for retirement or estate planning, please contact our Brandon estate planning law firm at (813) 438-8503 to set up a consultation.