The Roth IRA is a popular investment vehicle with many appealing features. For instance, you can grow your assets on a tax-deferred basis and take tax-free distributions after the age of 59½.
Further, as opposed to a traditional IRA, a Roth doesn’t require minimum distributions at age 70½. Another advantage is that you can use your Roth to leave a tax-free benefit to your loved ones. With a Roth, after you pass away, your beneficiaries can receive the assets tax- and probate-free.
There are, however, a few complexities associated with the Roth IRA that you might want to consider. But with some planning, you can maximize the benefits and increase the amount left to your beneficiaries.
Below are three common mistakes that may hurt your beneficiaries:
Overlooking nonspousal beneficiaries.
It may seem natural to name your spouse as a beneficiary to your Roth. It’s not necessarily a bad idea, though there might be some good reasons to name a child or grandchild as the beneficiary.
While nonspousal beneficiaries are normally required to start taking distributions immediately, they can stretch those distributions over their life expectancy. And the longer their life expectancy, the smaller the distributions, meaning the younger the heir, the longer they can stretch those distributions.
Not talking to your heirs.
Naming nonspousal beneficiaries can be a valuable strategy. However, it can be complicated. If you choose to name people other than your spouse, you should probably make sure to implement careful planning and analysis. And part of this planning is discussing your wishes with your beneficiaries.
Generally speaking, heirs are not required to follow your instructions after you pass. But if you make your plans clear, they might be more likely to adhere to your wishes.
Not considering contingent beneficiaries.
Naming a spouse as a beneficiary is common, but what if your spouse passes before you? Or what if you both die at the same time? In cases where the primary beneficiary is no longer alive, the assets will pass to your contingent beneficiary.
If you haven’t named a contingent beneficiary, then your assets are distributed to your estate. Why is this a problem? Because if the funds are distributed across the estate, the assets are taxable and are required to go through probate, which would negate the main advantage of a Roth IRA.
Worried that you haven’t planned your Roth properly? Let’s talk about it. Contact us today at Carstens Financial Group for more information. We can help you examine your needs and goals, and then develop a strategy. Let’s connect soon and start the conversation.
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