The allure of tax-free growth has made the Roth individual retirement account an increasingly popular investment vehicle to leave to children or other loved ones. But heirs won’t reap the full benefit of a Roth if it isn’t passed down correctly.
Roth IRAs are different from traditional IRAs in that contributions are made after taxes instead of before. Withdrawals from a Roth in existence for five years or more after age 59½ are income-tax-free, and beneficiaries of an inherited Roth also don’t have to pay income taxes on withdrawals and additional growth in the account.
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“You have to preserve the title,” says Diana Zeydel, global chairman of the trusts and estates department at law firm Greenberg Traurig LLP in Miami. Otherwise, your heirs may not be permitted to stretch out required distributions across their life expectancy, which is what gives the remaining assets more time to grow tax-free.