Make Your Retirement Last

If you’ve decided that now is the time to shift assets from a traditional IRA to a Roth IRA, you face an important decision in learning how to make your retirement last. Who will you name as the beneficiary of the new Roth IRA? Your children or grandchildren may seem like the obvious choice. But if your heirs aren’t financially savvy, they could end up squandering the assets you worked so hard to accumulate. However, if you opt instead to name a trust as a beneficiary, you could possibly make your Roth IRA last for decades after you’re gone.

Why invest in a Roth IRA at all? The big attraction of a Roth is that qualified distributions are exempt from federal income tax. In addition you don’t have to take required minimum distributions from a Roth beginning at age 70½, unlike a traditional IRA. Those factors can make converting a traditional IRA to a Roth very appealing.

Before you make the decision to convert, however, you need to consider a number of factors, including your anticipated tax rate in retirement, your age, and whether you have funds available to pay taxes on the conversion. If you do decide to convert, you then need to name beneficiaries. While leaving the Roth to your heirs could extend its life, it could also put a significant sum of money into the hands of those unable to manage it responsibly (this may be a particular concern if you are naming young grandchildren as heirs).

Naming a trust as the beneficiary of your Roth can help avoid this problem. Your designated heirs will still get the money, but the trust can delay distribution until they are of age, or even beyond. And before the distributions occur, a professional trustee can manage the assets, potentially increasing their value.

While you are never required to make withdrawals from a Roth IRA, your heirs will have to take distributions (even if you place the assets into a trust). Annual payouts will be based on the life expectancy of the oldest. If you’ve leaving the Roth to a number of beneficiaries who vary widely in age, you may want to consider dividing it into more than one trust, thus extending the life of the Roth for the youngest heirs. The decisions you make regarding your Roth IRA will depend on your specific situation, and you’ll want to work with a qualified financial planner, an estate planning attorney, and your tax advisor to develop a sound plan. www.chriscooper.com

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