Recently, Congress bestowed the American people with a break that will certainly turn heads. This tax break is the ability to receive a tax-free inheritance of $400 million or more. The creation of this break was created by a two-fold agenda that occurred last year. First, there was $100,000 income restriction on converting between a 401(k) to an IRA to a Roth IRA. Congress lifted that restriction, allowing the wealthiest of people to make such conversions. Second, Congress raised the generation-skipping transfer tax exemption from $3.5 million to $5 million. So what’s so great about a Roth IRA?
A Roth IRA allows gains to be withdrawn tax free where as money taken out of a 401(k) or IRA are susceptible to income-tax rates. The Roth IRA also allows funds to stay in the account even passed the typical age of withdrawing from retirement. Thus, any amount of money left for heirs is safe and tax-free.
The immediate benefit of converting to a Roth IRA is not immediately apparent because you still have to pay income taxes on the assets transferred to the account. Although, in terms of estate planning, there is foreseeable results in maintaining a Roth IRA. Specifically, the income taxes you are paying now will NOT outweigh the benefits your grandkids will see in future years. This is not just for the wealthy either – if you invest $100,000 in your Roth IRA, you grandchild would receive $8 million, tax-free, assuming an 8% annual return and average life expectancy of ~80 years.
Congress changed estate planning drastically so anyone can benefit from a Roth IRA. Now, more than ever, should you start considering estate planning and future plans on how to allocate your assets for your loved ones.