A smart way to pass on wealth to generations with a Roth IRA | Job Binary

If you’ve been sleeping on your Roth IRA (Individual Retirement Account), now is the time to wake up and unlock its full potential. While the account focuses on tax-free cash withdrawals after age 59 1/2, the benefits can go beyond you. Your Roth IRA can serve as a tax-free wealth-building vehicle for the next generation.

If you want to set your heirs up for financial success, here are some Roth IRA benefits and considerations to make the process easier.

Two children put money in the bank and two adults watch.

Image source: Getty Images.

You can max out your Roth IRA to supplement your portfolio

If you want to save a lot of money to give to your heirs, you should use annual contributions. Until 2022, you can save up to $6,000 in a Roth IRA if you’re over 50 and meet the income requirements. When you turn 50, you can leave an extra $1,000 in your account to grow your retirement savings.

You can contribute the maximum amount to a Roth IRA if your income is less than $129,000 as a single filer and $204,000 as a married filer. After that, you will enter the phase-out range and can make reduced contributions. You cannot make direct contributions when your modified adjusted gross income (MAGI) exceeds the upper limit.

Here are the Roth IRA periodic ranges you should consider if you want to contribute the maximum amount to your Roth IRA.

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2022 Income Period End Range

Single or head of household

$129,000 to $144,000

Joint marriage

$204,000 to $214,000

Data source: IRS.

Maxing out your Roth IRA is a great way to boost your retirement savings. The next step is to invest in high quality assets that match your goals and risk tolerance so you can get closer to the million dollar mark.

Let’s take a look at how much you can save in a Roth IRA if you start growing your account at age 35.

  • Age: 35
  • Annual fee: $6,000
  • Investment rate of return: 10%

At age 66, you will have more than a million dollars in your account. Any money left in your account can continue to earn compound interest. There is no limit to how much you can earn in a Roth IRA.

Minimum distributions required won’t get in your way

Roth IRAs don’t bother you with required minimum distributions when you reach a certain age. Unlike a traditional IRA, you can keep the money in a Roth IRA as long as you want. This means your Roth IRA can enjoy tax-free growth for years.

If you need to tap into a Roth IRA in retirement, your distributions won’t raise your tax bill. As long as you’re at least 59 1/2 and meet the requirements of the five-year rule, every penny you withdraw from a Roth IRA is tax-free. If you take a qualified distribution, you don’t need to include Roth IRA distributions in your taxable income. You have already paid tax in the year you added to the account.

Gift a Roth IRA

If you never need to dip into a Roth IRA in your lifetime, your money isn’t wasted. Your heirs can benefit from your Roth IRA nest egg. Make sure you name them as beneficiaries when you open a Roth IRA. You can also update your Roth IRA beneficiaries if needed. Check your Roth IRA beneficiaries to make sure your funds are going to whom they are designated.

In general, your heirs can take tax-free distributions from a Roth IRA for up to 10 years. It is best to consult with a financial professional to discuss beneficiary designations. Leaving a Roth IRA to a minor can be tricky. If you’re the recipient of a Roth IRA from your parents, you’ll want to make sure you understand how an inherited Roth IRA works so you don’t lose your tax benefits.

Discover the secret of your generational wealth

The steps you take can prepare your heirs for a prosperous future. Start with your goals and aim to contribute as much as possible to your Roth IRA account during eligibility. The money in your account can continue to grow tax-free throughout your life without worrying about RMDs. If you don’t need to touch the money, your children can enjoy Roth IRA funds and use them to create another wealth-building opportunity for the next generation.

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