Thinking of Leaving a Roth IRA to Your Heirs?

The idea about leaving a Roth IRA to your heirs seems to make sense on paper. Leaving money to your children or other heirs through a Roth IRA will essentially let your money grow tax-free over not only your lifetime but theirs as well.

Due to new IRA rules being proposed however, it’s now a bit more complicated a decision, one that should keep you from rushing to convert all or part of any traditional retirement accounts that you have to a Roth IRA before taking a better, longer look at the facts.

The fact is, a Roth IRA isn’t always the best way to pass down your wealth according to many financial experts. They will tell you that your decision will depend very heavily on your tax rates, both yours and any heirs that you are considering leaving the money to when you pass away. They will also tell you that it depends on whether lawmakers approved some of the rule changes that they’re proposing, changes that could eliminate some of the perks that a Roth IRA brings to estate planning.

One of the main reason that many people use Roth IRAs to leave the money is that the account holders are not required to start getting distributions when they turned 70 ½ years old, like they are with traditional IRAs. That means that the money they inherit keep growing tax-free throughout the lifetime of the owner, a very big plus for people who don’t actually need those assets in order to survive.

Of course anyone inheriting any type of IRA is legally obliged to start taking distributions immediately but, since they can stretch those payments out over their entire lifetime, they can let the bulk of the money in a Roth IRA continue to grow for them tax-free.

One of the new rule changes being proposed by the IRA would require owners of Roth IRAs to start taking distributions at age 70 ½, something that Jamie Hopkins, a professor in the retirement income program at the American College in Bryn Mawr Pennsylvania, said could “pretty much wipe out any asset pool by the time a person can leave anything to their heirs.”

Another change being proposed would take away the ability for an IRA beneficiary (non-spousal) to stretch out their distributions over their lifetime. The new rules would force them to take their disbursements within five years after the owner had passed, although certain beneficiaries would be exempt.

If these proposals are enacted they would seriously reduce the benefits that a Roth IRA brings to estate planning. The fact is that any contributions made to a Roth IRA are made with after-tax money, meaning that withdrawals are tax-free when all of the specific rules are met. For traditional IRA is the opposite is true as any contributions made are for taxes, and all withdrawals are taxed. Because of this, when someone converts a traditional IRA to a Roth IRA they end up paying a hefty upfront tax bill.

Ed Slott, founder of, believes that the proposed new rules are flawed. “If there’s no stretch IRA, it doesn’t pay for an older person to convert to a Roth,” he says, adding that “Why should someone 60, 70 years old, who’s mainly doing it for their beneficiaries, pay a tax when the deferral rate after they die is limited to five years?”

That’s a very good question, and one that will need to be answered by anyone considering converting a traditional IRA to a Roth IRA when leaving money to their family.

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