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Estate Preservation: Using the Roth IRA

There are many estate preservation benefits that come with the Roth IRA. By placing assets that you wouldn't need in your lifetime into a Roth IRA, you could be building up a healthy inheritance for your children, free of income taxes.

Roth IRA Vs. Traditional IRA
Here's how it works: Under traditional IRA rules, you would have to start making minimum withdrawals as soon as you turn 70 1/2, which could quickly deplete your account. But with the Roth IRA, you aren't required to withdraw money during your lifetime. And while the value of the Roth IRA will be subject to estate taxes, your heirs wouldn't have to pay income tax on the money as they withdraw it over their single life expectancy.

Under new Roth legislation, your heirs may have a longer time to withdraw the money you've left for them, leaving the money in the account to compound tax-free.

With the traditional IRA, the payout schedule would have been based on your life expectancy. But with the Roth IRA, if you decide to bequeath it to your heir, the distribution schedule is based solely on your heir's life expectancy — which means if your heir inherited the account at age 30, and lived to age 86, he or she would be entitled to withdraw money from the Roth for the next 56 years.

If your heirs chose to leave assets in the Roth IRA, the tax-free compounding can lead to greater assets than if the money had stayed in a traditional IRA. (But remember, to ensure a lifetime income stream from a Roth IRA, heirs must make the first withdrawal by December 31 of the year after the IRA owner's death. If they don't, they must cash out the account by the end of the fifth year following the year of death.)

If you're still worried about paying taxes on a conversion, think of it as a way to reduce estate taxes. By paying the money up front in taxes, you're reducing your taxable estate. And if your estate is over the estate-tax exemption $1 million, there are other options that you might want to consider. You can create a survivorship (second-to-die) life insurance policy outside of the estate that would not be subject to estate and income taxes. A NYLIAC Survivorship Variable Universal Life (SVUL), which covers two individuals and provides a life insurance benefit after the death of the last surviving insured. Your heirs could keep the assets in their inherited Roth IRA intact by using that money instead to pay estate taxes.

You can consider a Roth IRA a nest egg for your future or as a guarantee for your children's. Either way, it's worth taking a second look.

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Estate Preservation: Using the Roth IRA

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