Roth IRAs can play an important role in estate planning, and, at Geyer Law, we think it’s important to remind our clients that the rules have changed under the new tax law. “Clients will require more advice,” retirement planning expert Ed Slott writes in Financial Planning, and he’s absolutely right.
Tax law changes that bode well for doing Roth IRA conversions include:
- Tax rates are lower compared to last year, with a doubled standard deduction and lower rates, which makes a Roth conversion less onerous in terms of paying tax on the money when it is moved from a traditional IRA into a Roth account.
- Roth IRAs will now be free of estate taxes for most clients, now that the law has increased estate tax exemptions to $11.2 million per person.
- Since the gift tax exemption has also been increased to $11.2 million, it is easier to gift funds to younger family members to begin their own Roth IRA accounts, or to help the older generation pay the tax on their own Roth conversions.
- The new tax law raised the bar for generation-skipping transfer taxes, freeing more Roth IRA funds to be passed tax free to younger relatives.
One change in the law about which we need to caution clients contemplating doing a Roth conversion is that, beginning this year, Roth conversions cannot be undone. For that reason, Ed Slott actually advises waiting until after Thanksgiving to do a 2018 conversion, when you have a more precise estimate of your 2018 tax burden.
At Geyer Law we offer neither tax nor investment advice, but we believe Roth IRAs definitely deserve a place in estate planning discussions for a variety of important reasons:
- Earnings in a Roth IRA are tax free.
- You may be able to contribute to a Roth even if you have a 401(k) or 403(b) account.
- Withdrawals are never required.
- After age 59 ½, you do not pay tax on “qualified withdrawals” (the account was opened more than five years ago or the balance is being paid to a beneficiary after your death).
- Having a Roth IRA allows you to offer some tax planning advantages to your beneficiaries as well as to benefit certain ones outside of your will and trust.
- Your beneficiaries will not pay any income tax on the distributions.
- Your beneficiaries have the choice of rolling over the money into an inherited Roth IRA, where the assets would continue to grow non-taxed (distributions are required based on the oldest beneficiary’s life expectancy).
Roth IRAs have quite an important role to play in estate planning, and under the new tax law, the benefits can be better than ever!
