Aging Options

Roth IRAs versus traditional IRAs

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The primary difference between Roth IRAs and traditional IRAs is the point at which your investment is taxed.  Contributions to a Roth IRA are not tax-deductible and withdrawals are generally tax-free.  The benefit to Roth IRAs is that there are fewer restrictions and requirements.  For inheritance purposes, passing a traditional IRA to your children means passing the tax ramifications off to them as well.  Once someone has transferred that money out of a traditional IRA to a Roth IRA, their children can inherit their Roth IRA without any tax consequences.

Beginning in 2010, people with money in traditional IRAs could roll that money into Roth IRAs.  Investors then had to wait for five years to withdraw earnings tax-free.  The five-year period begins January 1st of the year investors made their first contribution.  Once an investor reaches 59 ½ and has kept funds in the account for five years, he or she can withdraw from the account tax-free.  That five-year period for those initial investors has ended.

One of the biggest benefit of the Roth IRA is that unlike traditional IRAs, there are no required minimum distributions.  RMDs can force an investor into another tax bracket but Roth IRAs are friendly to inheritance.  Those investors who don’t need to take distributions from their Roth can leave it untouched and distribute it tax-free to children or grand-children over many years or conversely if they need to gift it in order as part of a Medicaid spend down they can do so without taking a big tax hit.  Inherited Roth IRAs require beneficiaries to take annual distributions during their lifetimes based on the oldest beneficiary’s life expectancy.  There are many benefits of a Roth IRA over a traditional IRA, if you would like to hear more about how conversion of a Roth IRA can help you avoid becoming a burden and help to preserve your assets, come to a free seminar.

Please see this article from the Wall Street Journal.

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