Roth IRA Beneficiary Advantage


Properly filling out your Roth IRA beneficiary statement is the first step in creating a powerful wealth building tool for the next generation. Besides saving for retirement, a Roth IRA – given its unique qualities – can be used as an important tool in your estate plan.

Unlike most retirement accounts, Roth IRAs are not subject to required minimum distributions. RMDs kick in at age 70 ½. It’s all about Uncle Sam wanting his tax money. The bottom line is that your pre-tax retirement accounts may be empty by the time you reach the latter years of your retirement.

Save your Roth IRA till last

That’s the big Roth IRA beneficiary advantage: Tap other retirement accounts first and save your Roth IRA until last. Thanks to no RMDs, that gives you a longer time horizon for investment, allowing you more time to accumulate tax free cash.

Let your tax free earnings earn more tax free earnings

What if you don’t make it to the latter years of your retirement? Let’s say you get hit by a bus (I tried to make it as painless as possible for you.) Your loved ones, those named Roth IRA beneficiaries, will get the tax free cash rather the taxable variety.

Rules and procedures must be followed to insure all money is tax free. Let me take you, step by step, from beginning to end. The information provided will aid both the account holder and the beneficiary.

The all important Roth IRA beneficiary statement

A properly completed Roth IRA beneficiary statement is all that’s needed to insure a hassle-free exchange at the time of the account holder’s death. It is a legitimate will substitute, meaning the money does not go through the probate process.

The names you write on the Roth IRA beneficiary statement supersede any instructions in your will that may be contrary. Absent any extenuating circumstances, if you have Sally as your primary Roth IRA beneficiary and you say that Billy gets the Roth in your will, Sally ends up with the proceeds.

If you want more than one beneficiary to inherit your Roth IRA, be sure to put all of them on the primary beneficiary line with percentages of inheritance, if appropriate. If Sally is on the primary beneficiary line and Billy is on the secondary beneficiary line, Sally gets the money again. Only if Sally pre-deceased the account holder would Billy inherit the Roth IRA.

Fill out both the primary and secondary beneficiary sections. Catastrophes are rare but do occur. Familiarize yourself with the Latin terms per stirpes and per capita, especially if children are named beneficiaries. [This link takes you offsite to NoloPress.com.] Some financial institutions still insist on using these confusing terms. Consult an attorney if you’re not sure.

Your Roth IRA beneficiary statement is a very important document. Treat it as such. Review it, along with your other important estate planning documents, at least every three years, more often if there is a birth, death, adoption, divorce, or other major occurrence in your life.

Spouse as beneficiary

A spouse has many options when he or she is named as the Roth IRA beneficiary:

  • Leave the Roth IRA as is and take payments via the deceased spouse’s schedule
  • Roll it into their own Roth IRA tax and penalty free

Non-spouse as beneficiary

In most states, you can’t name a non-spouse as your beneficiary if you are married unless the spouse gives up their rights. This is usually done through an addendum which requires the spouse’s notarized signature.

A non-spouse beneficiary should set up a separate inherited Roth IRA to receive the funds, which will include the decedent’s name in the title. The beneficiary has two distribution options:

  • Take equal payments over their lifetime, starting no later than December 31st in the year after the year of the account owner’s death
  • Take all distributions by the end of the year containing the fifth anniversary of the account owner's death

The beneficiary has immediate access to the principal contributions of the decedent, as well as earnings if the account is over five years old.

Tax Free Cash for Your Beneficiaries

There you have it – the Roth IRA beneficiary advantage. Besides being a powerful retirement planning tool, a Roth IRA can also help you meet many estate planning objectives.

Important: Before filling out important legal documents like beneficiary statements or titling assets, consult with an attorney licensed in your state of residence.