To start, here are some of the basics about Roth IRAs for tax-planning purposes:
- Contributions to a Roth IRA are not tax-deductible, unlike other traditional retirement accounts.
- Distributions made if you are at least 59 ½ or if the account has been open for more than five years are not taxed.
- Income tax is paid when contributions are made, making eventual withdrawals tax-free.
- There are no required minimum withdrawals with a Roth IRA.
The last point is the one that makes Roth IRAs perfect for avoiding probate in Ohio, as long as you follow these two steps: 1) Let your savings accumulate tax-free in a Roth IRA indefinitely, and 2) Name a beneficiary to your account.
When you pass away, the account will go to your named beneficiary, and the assets in the Roth IRA will not have to go through the probate process like other assets that are solely owned by you. You should regularly check your beneficiary designations to make sure they’re up to date. If, for example, your late spouse was named as the beneficiary of your Roth IRA, the Roth IRA will become part of your probate estate if you do not name any replacement beneficiaries.
It is important to note, though, that there are some limitations to Roth IRAs. As of 2018, individuals under the age of 50 can only contribute up to $5,500 a year into their Roth IRAs, while people 50 and over can contribute $6,500 a year. In addition, you can only contribute to a Roth IRA if your income is below a threshold of $135,000 for single filers and $199,000 for married joint-filers. Contribution limits decrease as you move further up the threshold.
You may also have to pay income taxes or early distribution taxes if you make unqualified distributions, such as distributions before the age of 59 ½ or before the Roth IRA is five years old. However, you may be eligible for a tax-free distribution if you make the withdrawal to purchase your first home or if you need the money due to a disability.
If you have any questions about using a Roth IRA for estate planning, or if you’d like to have your current estate plan reviewed, please contact us at 877-653-3450 to schedule a complimentary initial consultation.