Roth IRA estate planning | Fidelity Investments (2024)

Among the reasons to consider this move: A Roth IRA offers unique benefits when it comes to estate planning, explains Michelle Caffrey, vice president of advanced planning at Fidelity. “Given the potential for tax-free growth and distributions, a Roth IRA may be the most income-tax-efficient asset to leave to your heirs,” Caffrey says. “For clients who want to maximize what they’re leaving to their heirs and spend down their own taxable estate, it’s very likely that we’ll be having a discussion about Roth conversions.”

Here are 4 reasons a Roth IRA may help you reach your estate-planning goals and benefit your heirs.

1. Your savings have the potential to grow longer. Owners of traditional IRAs and other tax-advantaged retirement plans must take required minimum distributions (RMDs). The RMD age has increased to age 73 for anyone who turned 73 after January 1, 2023, and before January 1, 2033, and age 75 for anyone who turns 74 after December 31, 2032. The original owner of a Roth IRA, however, does not have to take RMDs, nor does a spousal beneficiary who rolls the funds into their own Roth IRA. So if you don’t need to tap your Roth savings, you won’t be forced to withdraw those funds. Instead, you or your spouse can continue letting the money potentially grow in a tax-free environment. It also may allow for a more aggressive investment approach given the longer time horizon.
2. Heirs get income-tax-free distributions. While the original owner (and a potential surviving spouse) of any IRA may enjoy a longer window of either tax-deferred or tax-free growth, beneficiaries who inherit these types of accounts may be in a different situation. The 2019 SECURE Act mandated that most non-spousal beneficiaries must withdraw the funds in any inherited retirement account—including Roth IRAs—in their entirety by the 10th anniversary of the original owner’s death. Non-spousal heirs of non-Roth IRAs or 401(k)s must also pay income taxes on those withdrawals. This can result in tax-bracket creep, affecting their Medicare premiums, Medicaid eligibility, and taxation of Social Security benefits. Withdrawals from inherited Roth IRAs, however, are generally tax-free.¹“When you convert a traditional IRA to a Roth, with no intention of needing to use the Roth assets, you’re essentially prepaying the taxes on behalf of your beneficiaries,” says Caffrey.

   In addition to federal income tax savings for the beneficiaries, this can also be significant in certain situations when it comes to state income taxes: “An IRA owner who converts to a Roth in a state where they pay no taxes, such as Florida, is really helping that beneficiary who lives in a high-income-tax state like California or New York,” points out Caffrey.

3. You can reduce your taxable estate. For 2024, the estate tax exemption is $13.61 million for singles and $27.22 million for married couples. There are also currently 12 states and Washington, DC. that have much lower state estate tax exemptions; in some of these states, if you exceed that exemption, it may cause your entire estate to be subject to estate taxes. “A Roth conversion can be a strategy to potentially reduce your taxable estate by paying that income tax,” Caffrey says. However, the value of the Roth account will be included in your estate for estate tax purposes.

   It’s also important to keep in mind that the current estate tax exemptions are tied to the Tax Cuts and Jobs Act, which is expected to sunset on January 1, 2026. After that, unless Congress makes the change permanent, the federal estate tax exclusion amount is expected to drop approximately in half. “The IRS is always going to look at your prior gifts, so if a single person has given away $12 million, as of 2026, they no longer have any remaining exemption. A Roth conversion, through the payment of income taxes, is a technique that can further assist in reducing the taxable estate,” notes Caffrey.

   See Also

   4 Roth IRA Moves to Make in 2024 | The Motley FoolAsk an Advisor: I’m 60 With $65k in Pension Income and $100k in My IRA. Is a Roth Conversion Worth It?Best Roth IRA Accounts of April 202410 Best Investments for Roth IRA Accounts [Tax-Smart Growth]

4. It offers a flexible option for a trust. If you own significant assets in retirement accounts and your estate plan incorporates an irrevocable trust to be funded at death, keep in mind that the 10-year liquidation rule for non-spousal beneficiaries may likely apply. In some cases, the income retained inside a non-grantor irrevocable trust may result in unexpected taxes based on trust tax rates. In 2024, the highest tax bracket for a trust is 37% and starts when ordinary income reaches $15,200, making the trust a fairly tax-inefficient option. By converting those assets to a Roth, you can utilize the potential benefits of a trust, such as asset and spendthrift protections and distribution control, without being concerned with potential increased tax drag.²

Roth IRAs in the context of estate planning can be complex, and there are many situations in which a conversion may not make sense. “A Roth conversion has to be considered as part of your comprehensive financial and estate plan considering both short- and long-term impacts as well as alignment to your overall goals,” Caffrey says. Talk to your financial professional or attorney about whether a Roth IRA would benefit your family’s estate-planning goals.