Estate-Planning Alert: Roth IRA Rule Changes Could Hurt Heirs

Estate-Planning Alert: Roth IRA Rule Changes Could Hurt Heirs

If you've ever dabbled in planning your estate, you may have heard about the benefits of opening a Roth IRA.

But money-savvy investors may now want to think twice before using Roths as a way to leave behind a legacy. That’s because President Obama has included two proposals in his 2015 budget that would eliminate some key estate-planning benefits, The Wall Street Journal reports.


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Let’s start with some background: Why do investors use Roth IRAs to leave money to heirs in the first place? For one, while owners of traditional IRAs must start withdrawing money by age 70.5, that rule doesn’t apply to Roths—allowing owners to preserve that cash for their loved ones.

What's more, people who inherit Roth IRAs can stretch out distributions over their lifetime, too—leaving the money in the account to grow tax-free.

But Obama's proposals are threatening these big-time benefits. One would require Roth IRA owners to start taking money by age 70.5, just like they would with a traditional IRA—leaving less cash for heirs to inherit. The second proposal would mandate that most non-spousal beneficiaries of Roth IRAs would have to take all their distributions within five years of the account owner’s death.

At this point, it’s unclear whether these proposals will actually become law. But even if they don’t, there's one big reason to be wary of using the Roth IRA as an estate-planning tool.

If your current tax rate is higher than the rate you or your beneficiaries will pay down the line on withdrawals from your IRA, you should stick with the traditional version because those contributions are pre-tax. Otherwise, those tax-free distributions from a Roth IRA aren't actually beneficial—as you'll be shelling out more in taxes now than you would later.

Curious about other ways to provide for your heirs? Check out our interview with an estate attorney.


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