Advantages of an Inherited Roth IRA

Roth IRAs are tax friendly and can also be inherited. This is one of several ways to leave money to your loved ones without going through probate court.

Roth IRAs Generally

The following some basic information on how Roth IRAs work:


Opening a Roth IRA depends on your income. The higher your income, the less amount you are allowed to put into a Roth IRA per year. Once you reach a certain limit, you cannot create or contribute to a Roth IRA anymore. The level changes every year so make sure to check if your income level would qualify you to create a Roth IRA.


Age also affects the amount you can contribute to a Roth IRA. People over 50 years old are allowed to contribute more than people below 50.


You can withdraw at any time without tax or penalty the after-tax contributions that you make. However, the earnings on those contributions will be taxed and penalized if you withdraw your earnings before you turn 59 1/2 and have had the account for at least five years.

Roth IRA Tax Advantages

Contributions to a Roth IRA are not tax deductible, unlike a contribution to a traditional IRA, 401(k)s or Keogh. However, the advantage a Roth IRA adds is that it will not be taxed when you eventually withdraw the money, unlike other retirement accounts.  The best way to see the advantage is to think of a single dollar contribution. Under a Roth IRA, you owe taxes on that one dollar up front; but years down the road when that dollar has grown into say ten dollars, you don’t owe taxes on those ten dollars. The opposite would be true for traditional retirement accounts. The advantage of a Roth IRA is further increased by the fact that most individuals are in a higher tax bracket as they get older, making the savings even more significant.

Roth IRAs and Avoiding the Probate Process

Traditional retirement accounts allow for it to avoid probate by designating a beneficiary upon the death of the holder of the account. But a lot of times there are other requirements that may minimize the account’s usefulness when they are inherited. For example, traditional IRAs require the account holder to start withdrawing from the account at age 70 ½. Assuming that the account holder lives longer, then there is a smaller amount left for the beneficiary.

In contrast, Roth IRAs do not have such withdrawal requirements. You may choose to withdraw or not withdraw the money, giving you a chance to leave more for your beneficiary when they inherit the Roth IRA.

Designating beneficiaries for your Roth IRA is easy. All you need to do is request a beneficiary form from the account custodian, and name whomever you want as beneficiaries of the account. This form is sufficient and you do not need to even include the account in a will or trust. The beneficiaries only need a copy of your death certificate and personal identification to claim the money in the account.

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