By Chris Heisten, CRPC®, CFP®, CSRIC®

In the world of financial planning, few opportunities can match the enduring value of a Roth IRA for your loved ones. It’s not just a present for the moment; it’s an investment in their future. With its remarkable tax benefits, a Roth IRA can grow tax-free indefinitely, setting young generations on a path to financial stability and prosperity. Let’s explore how you can leave a lasting legacy with Roth IRAs.

Tax Benefits of Roth IRAs

A Roth is an incredible tool to help you limit and manage your tax liability in retirement and beyond. You contribute after-tax funds to the account and then your contributions grow tax-free. As long as you meet certain requirements, all withdrawals will be tax-free in retirement.

The best part about Roth IRAs from an estate-planning perspective is that they do not have an RMD requirement. With most tax-deferred retirement accounts, the owner must begin taking required minimum distributions (RMDs) when they reach age 73, regardless of whether they need the money to live. But this is not the case with Roths.

How Does a Roth IRA Help You Leave a Lasting Legacy?

Essentially, not taking RMDs means you can leave the money in your Roth to grow for your lifetime, even making additional contributions after you retire if you continue to earn an income. You can then use this nest egg as an estate planning tool to provide a tax-efficient inheritance for future generations. If you’re looking for a way to set aside a meaningful legacy for your kids and grandkids, a Roth IRA is a great way to do it.

The funds in the account will pass income-tax-free and as long as you have your beneficiary designations in order, the account will pass outside of probate, which can save significant time and money for your heirs.

Depending on the type of beneficiary you name (spouse or non-spouse), there will be different rules regarding the timing of distributions from the inherited account. In most cases, your beneficiary will have up to 10 years to withdraw funds, giving them that much more time to let the account grow tax-free.

What if I’m Not Eligible? 

There’s no doubt that Roth IRAs boast many pros, but one major limitation is that most high-income earners don’t qualify. As of 2023, you’re ineligible to contribute to a Roth IRA if you make more than $153,000 as an individual or $228,000 as a married couple. Thankfully, you aren’t out of luck. Here’s how you can still reap the rewards of a Roth IRA and leave a lasting legacy for your heirs.

Roth Conversions

A Roth IRA conversion is when you move funds from a pre-tax retirement account (401(k), 403(b), traditional IRA, etc.) into a Roth IRA. Because the contributions made to your original account are pre-tax, you will be required to pay taxes on everything coming out of the account before it’s deposited into the new Roth IRA.

With the taxes paid, the conversion can occur. Your funds can now grow tax-free regardless of how high you climb up the tax bracket ladder. The primary goal of a Roth IRA conversion is to lower your tax bill in the future. 

Roth conversions can be performed a little bit at a time. That way, you can convert just enough of your account to bring your taxable income for the year to the top of your tax bracket without pushing it into a higher one. A Roth conversion strategy can be used over a span of years to move money from pre-tax retirement accounts to a Roth IRA while limiting your tax liability. In many cases, it is important to have outside funds available to pay income tax on a Roth conversion.

Backdoor Roth

A backdoor Roth IRA is an IRS-sanctioned loophole that lets high-income earners reap the benefits of a Roth without violating the income limits. 

Let’s say your income exceeds the legal limit for a Roth IRA, but you still want to fund an account. First, you will need to open a traditional IRA and fund it with non-deductible contributions. Then you will immediately convert your non-deductible IRA to a Roth IRA and repeat this process each year in order to take advantage of tax-free growth. 

In this scenario, you can avoid the IRA income limits, but you cannot avoid the annual contribution limits. For 2023, you can fund a maximum of $6,500 (or $7,500 if over the age of 50). This may seem small, but over time you can amass a sizable nest egg that can be passed tax-free to your loved ones.

As with anything tax-related, consult a wealth advisor to position your money in a way that minimizes tax liability and maximizes growth.

Give the Opportunity of Tax-Free Funds

The opportunity of financial stability is one that truly keeps on giving. By harnessing the power of tax-free growth, these accounts offer young beneficiaries a financial head start like no other. It’s a legacy that extends beyond the confines of time, providing the opportunity of financial freedom that can be cherished for generations to come. So, if you’re seeking a meaningful way to invest in your family’s future, we at Heisten Financial would love to help. Consider reaching out to our team to establish a customized financial strategy by emailing jami@heistenfinancial.com or calling 907.222.6270.

About Chris

Chris Heisten is President and Founder of Heisten Financial LLC, a fee-based boutique financial planning firm with the focus of giving clients back their time so they can spend it doing what’s most important to them. Acting as a true fiduciary for his clients, Chris aims to solve their financial pain points and move them toward financial freedom. In the financial industry since 2007, Chris partners with business owners and oil workers on their journey through life, striving to instill calmness and a sense of direction as he simplifies the complex. He loves nothing more than seeing clients experience relief when they achieve what they thought was impossible.

Chris graduated from the University of Maine, where he played hockey on a scholarship, and retired from professional hockey in 2007. In the community, he remains engaged serving as a youth hockey coach. Chris holds the CERTIFIED FINANCIAL PLANNER™, Chartered Retirement Planning Counselor℠, and Chartered SRI Counselor™ designations. Outside of the office, he enjoys trying new food and wine, reading, traveling, playing golf and hockey, fat tire biking, and donating to local charities. His passions include being a husband and dad, lake life with the family, watching his son and daughter play sports, and spending time with his wife. To learn more about Chris, connect with him on LinkedIn.