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Why is a Roth IRA beneficial to estate planning?

Both traditional IRAs and Roth IRAs offer some benefits when it comes to taxes and estate planning, but a Roth IRA comes with one benefit the traditional retirement account doesn't. Both plans let you put money away for retirement while reducing your tax burden, and you can use them both to pass some assets on to heirs without going through probate.

The way you avoid probate through a retirement account is to designate a beneficiary specifically for that account. You do this by completing a beneficiary form with the institution that holds your account. In many cases, the institution has you complete the form as part of setting up the account, but if you don't remember doing so, you can double check to ensure you have a beneficiary designated. You can also make changes to your beneficiary designation as needed -- check with your financial institution for information on how, when and how often you can make such changes.

Once you designate a beneficiary, the assets in the IRA go to that person upon your death without regard to the estate process. To avoid complexities or misunderstandings that can derail probate or create stress for heirs, do work with your estate planning lawyer to make sure your estate documents align with any beneficiary designations.

As to why a Roth IRA is more beneficial for passing on assets: It's because Roth IRA accounts don't require you to take disbursements from them. Traditional IRA accounts do require you start taking money out when you reach a certain age. You can use a Roth IRA to save money for your heirs if you won't need to use it during your lifetime.

Source: FindLaw, "The Advantages of an Inherited Roth IRA," accessed Oct. 21, 2016

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Law Offices of Nancy M. Rice
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