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Understanding the benefits of a Roth IRA for estate planning

When considering traditional individual retirement accounts and Roth IRA investments, most people assume these plans are solely related to retirement savings. In reality, though, many people leave behind some amount of wealth in IRA accounts, and that has to transfer to a beneficiary. In some cases, converting assets to a Roth IRA can be good for both the current holder and future heirs.

The mechanism by which retirement accounts transfer to heirs varies. In some cases, they transfer directly upon death if the proper beneficiary designations are set up with the account provider. This is especially true for spousal transfers, which come with some tax and other benefits that transfer to nonspousal heirs do not involve. In other cases, you might have to work with an estate attorney to ensure IRA transfers occur within the bounds of probate procedures.

In addition to the transfer of IRA assets, you might want to consider what type of tax burden occurs and how wealth might build over time in those same accounts. This is where the benefits of a Roth IRA come in over an traditional IRA for some situations.

If you convert from a traditional IRA to a Roth IRA, you will be on the hook for some taxes. Financial advisers say doing the math and planning ahead is essential to understanding whether you can make up that amount in Roth IRA gains over the future. The answer depends on your long-term goals for the account -- a Roth IRA can continue growing wealth for your heirs, for example, after you are gone. By working with the right professionals, you can align retirement savings planning with estate planning to support yourself and provide benefits for your heirs in the future.

Source: Kiplinger, "Roth Conversions May Be Boon for Heirs," Rachel L. Sheedy, March 28, 2017

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