What Options Do Your Roth IRA Beneficiaries Have After You Pass Away?

Filed under: Retirement

The Roth IRA has become a popular investment vehicle for people looking to save for their retirement. And it’s no surprise, really. Roth IRAs are a good way to save and come with unique tax advantages. For instance, assets in a Roth grow tax-deferred, and disbursements after the age of 59½ are tax-free.

Another advantage to a Roth is that it can be left to beneficiaries tax-free and probate-free. It’s common for people to name children, grandchildren or other loved ones as beneficiaries. Regardless of whom you name, they will have several options on how to take the assets. If you plan and discuss your beneficiaries’ options before you pass, then you can ensure your assets will be used the way you intended.

 

Take a lump sum.

To take a lump sum, probably the most straightforward option, all the beneficiary has to do is file a claim and submit it to the account administrator. The claim will then be processed, and the administrator hands over a check. Your beneficiary can do what they like with the money, and the income is completely tax-free.

 

Take funds as income.

This option might be particularly good for spousal beneficiaries. Simply, this option allows your spouse to take control of the Roth and let it grow for as long as they wish. The rules are a bit different for nonspousal beneficiaries, though. While they are not required to take a lump sum, they are required to take minimum distributions by Dec. 31 of the year following your death.

Distributions are based on your life expectancy. This means the funds may be drawn down over a relatively short period of time. But leaving the Roth intact as long as possible means the funds in it continue growing on a tax-deferred basis.

 

Stretch the Roth.

This option might be good for nonspousal beneficiaries. Stretching the Roth means taking distributions based on the beneficiary’s life expectancy, meaning the younger the beneficiary, the longer their life expectancy and the smaller the distribution.

Prolonging distributions lets nonspousal beneficiaries grow the assets in a tax-advantaged way. Choosing this option lets them have a continual stream of tax-free income.

Ready to plan the distribution of your Roth IRA? Let’s talk about it. Contact us at Ambrose Financial & Insurance Services for more information. We can help you analyze your needs and develop a strategy. Let’s connect today and start the conversation.

 

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16238 – 2016/11/15