Roth IRAs As Estate Planning Vehicles

When it comes to saving for retirement, many investors understand how well the Roth IRA works.  What they may not realize is that it is an equally effective estate-planning tool.  Seniors who convert a regular IRA into a Roth account can reduce their estate taxes and eliminate the income tax their heirs would otherwise have to pay on withdrawals taken from an inherited regular IRA. 

By converting your regular IRA into a Roth, you are not subject to the annual required minimum withdrawal rules that apply to traditional IRAs.  By leaving your Roth account balance untouched, you can accumulate as many tax-free dollars as possible for your estate. 

After you die, your Roth IRA balances become subject to a special set of requirement minimum withdrawal rules that apply to inherited IRAs.  Thus, your heirs will have to start taking annual withdrawals, but those withdrawals will be federal-income-tax-free as long as one of your Roth accounts has been open for more than five years.  If your heirs can afford to leave their inherited Roth money untouched (except for required minimum withdrawals) they can string out withdrawals over their life expectancies and continue to earn tax-free income on the remaining Roth account balance. 

See Bill Bischoff, Estate Planning with a Roth IRA, Market Watch, Feb. 11, 2015.