Modern Estate Planning Blog

Many people plan for their retirement by using Roth IRAs due to their great tax benefits, but most people don’t know that Roth IRAs are also excellent for avoiding probate.

First, here are some basics about tax planning with Roth IRAs that Sacramento County probate lawyers typically go over with their clients:

• Unlike traditional IRAs and other retirement accounts, contributions to a Roth IRA are not tax deductible.
• Qualified distributions (distributions made if you are at least 59 ½ or if the account has been open for more than 5 years) are not taxed.
• Your contributions are not taxed when they are withdrawn, meaning you’ll see bigger benefits the longer you save.
• There are no required minimum withdrawals with a Roth IRA.

It’s that last point that Sacramento estate planning lawyers say make a Roth IRA a perfect tool for avoiding probate. If you decide to let your savings accumulate tax-free in a Roth IRA indefinitely, the account will pass to the beneficiary you named on the account. Since you named a beneficiary, the assets in the Roth IRA will not have to go through the Sacramento County probate process like other assets that are solely owned by you.

You should always make sure that your IRA beneficiary designations are up-to-date, however, as your beneficiary designations will trump even the wishes listed in your will or trust.  For example, if your spouse is named as the beneficiary of your Roth IRA but passes away before you do, the Roth IRA will become part of the probate estate when you die so that a new beneficiary can be determined by the courts.  Or, if you forget to remove your ex-spouse as beneficiary, he or she would still be able to inherit your retirement account despite your legal divorce or any wishes outlined in your estate planning documents.

For these reasons, extra care must be taken when choosing beneficiaries of your retirement accounts.  A Sacramento will and trust lawyer can guide you as to the best practices for naming beneficiaries on your Roth IRA, while helping you select alternative beneficiaries who can inherit the funds in the event your first choice predeceases you.

If you have any questions about using a Roth IRA for retirement or estate planning, please contact us at (916) 241-9661 to set up a consultation.

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