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Will changes to Roth IRA affect heirs and beneficiaries?

Roth individual retirement accounts appear to offer a lot of great benefits for Texas investors and their heirs. This is because the money placed inside the Roth IRA can be left to grow without tax liabilities over an investor and his or her beneficiaries‘ lifetimes. However, these types of investment accounts are not best for all estate-planning scenarios.

The benefits of a Roth IRA depend on the tax rates of the investor and also on the tax rates of his or her beneficiaries. There is also the chance that lawmakers could approve a rule change that was proposed. This rule change could serve to cancel many of the Roth IRA’s estate-planning benefits.

For example, Roth IRA investors usually use this type of account because they are not forced to take distributions from the account at 70.5 years of age — which they are required to do with normal IRAs. This is helpful for individuals who do not require the funds for living expenses because it can remain in their account and grow tax-free. Meanwhile, even though heirs of the account must immediately begin taking distributions, they can spread them out across their lifetimes, which will allow the account to continue growing tax-free.

A 2015 budget plan issued by the president’s office could serve to change these benefits if passed. The first change would make distributions from Roth IRAs mandatory after the age of 70.5. The other change would require inherited Roths to be distributed within 5 years of the original Roth holder’s death.

If this measure and changes to Roth IRAs are approved, certain Roth holders may wish to convert their Roth IRAs. However, that is probably not a suitable strategy for many Texas residents. In order to evaluate the potential benefits of a Roth IRA and whether it is right for a given person and his or her beneficiaries, individuals may wish to consult with an estate-planning professional.

Source: The Wall Street Journal, “Should I Leave a Roth to My Heirs?“, Andrea Coombes, Sept. 7, 2014