4 Mistakes Clients Make With Roth IRAs and Their Estate


You make your Roth contributions with after-tax money and any distributions you take are tax-free as long as you are at least 59-1/2 years old and have had a Roth IRA account for at least five years.

Your beneficiaries can continue to enjoy this tax-free status for a period of time after they inherit the account. However, they will not be able to maximize their tax savings with the Roth unless it’s passed down in the correct manner. Here’s what you need to know and do.

Key Takeaways

  • By leaving your Roth IRA to your heirs, you can provide them with tax-free income for years to come.
  • Make sure you designate your beneficiaries when you open the account and change them in the future if necessary.
  • If you’re planning to use a trust, consult a financial or legal professional who’s familiar with the rules.

A Tax-Free Legacy

Roth IRAs can provide beneficiaries with a lasting, tax-free gift. As Scott Sparks, a wealth management advisor with Northwestern Mutual in Denver, told the Wall Street Journal, “from a legacy giving standpoint, it’s one of the more beneficial gifts that a person can pass on to the next generation.” With that and other advantages for the account holders themselves, it’s no wonder that Roth IRAs have become one of the most popular ways to save for retirement.

Pitfalls to Avoid

There are also some potential mistakes you’ll need to be aware of, and avoid making if your goal is to pass your account down to the next generation. According to financial advisors, the most common errors include:

Failing to name a beneficiary 

This is probably the most obvious error that a Roth IRA owner can make. If you don’t list a beneficiary, the account transfer may be determined by your will, which can be complicated, costly, and time-consuming. Roth IRA owners should name their beneficiaries as soon as they open the account, and change them, as needed, in the future.

This will ensure that the money in the account goes to the person for whom it was intended. Most financial institutions have separate Roth IRA beneficiary forms that you’ll need to be complete.

Choosing the wrong beneficiary 

Married couples usually list each other as the primary beneficiaries of their Roth accounts. When one spouse dies, the other spouse inherits the money. Then it is passed on again to another beneficiary upon the death of the second spouse.

But in the case of Roth IRAs, it may be wise to leave the money to younger beneficiaries. That’s because they can stretch the distributions out over their lifetimes and enjoy the tax-free income that may last for decades.

Bobbi Bierhals, a partner at the law firm McDermott Will & Emery in Chicago, told the Journal that “by far the biggest benefits of the Roth IRA after death are tax-free growth in the account and the fact that distributions can be made without income-tax consequences. You can potentially stretch that income tax-free growth for 50, 60, or even 70 years.”

However, leaving a Roth to a younger beneficiary may trigger estate or generation-skipping transfer taxes in some cases, so it’s worth consulting a financial professional who is familiar with the rules.

Establishing a trust incorrectly

Pouring your Roth assets into a trust after your death can be a good idea—as long as you’ve chosen the right type of trust and your beneficiaries are specifically named in the trust. The trust must be a conduit trust that will take out the RMDs each year. The trust documents also need to spell out all of the details pertaining to the distributions and beneficiaries. Otherwise, the IRS may require that the trust disperse all of the income in the account within five years. This is another area where seeking professional help is advisable.

Let your beneficiaries know that although you didn’t need to take required minimum distributions from your Roth IRA, they will generally have to.

Neglecting to take required minimum distributions (RMDs)

This is a mistake that beneficiaries can often make. Non-spouse beneficiaries who inherit a Roth IRA are usually required to begin taking distributions from it by December 31 of the year after the year in which the original account owner died.

If the beneficiary fails to do this, they may be forced to withdraw all of the money within five years instead of spreading the distributions out over their lifetime. There can also be substantial tax penalties for failing to comply with the RMD rules.

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