What is a Roth IRA?

Unlike an IRA or a 401k Plan, a Roth IRA is funded by after-tax money; that is, you do not get a tax deduction for contributions to a Roth IRA (as opposed to contributions to an IRA or 401k Plan). However, after a five-year “vesting” period, during which you cannot receive any distributions without tax consequences from the Roth IRA, you may receive distributions from the Roth IRA tax free.

The ability to receive distributions from the Roth IRA after five years is not the important part-it is the tax-free part. After five years, the owner may receive Roth IRA funds and any increase in the value of its investments can be distributed tax-free, as well.

IRA and 401k conversion

For seniors, especially those who have reached the age of 70 and one-half and mandatory IRA withdrawals, conversion of IRA and 401k assets to Roth IRAs should be a consideration, as long as the senior’s own cash needs are considered. Payment of taxes is unavoidable at that time, but the IRS may allow taxes to be spread out over a period of time.

Also, there are no mandatory distributions of Roth IRAs, so once the money is there you may continue to accumulate it there, pending your death and distribution according to your will or final estate plan.

What, and what not, to convert

Placement of assets into Roth IRAs to leave to your heirs may give your heirs a huge tax break if you place stocks, bonds, or other long-term assets that you expect to grow over time (think Microsoft stock bought in the early 90s). Placing those assets into the Roth IRA will cause you short-term pain as you, perhaps, pay income taxes on any conversion from a traditional IRA, but your heirs will thank you for it.

Under the current rules-and they may change-they will be able to structure receiving their Roth IRA benefits throughout their lifetimes.

However, as indicated from this article, none of this is simple; there are more than a few complications in deciding whether to convert an IRA or 401k Plan into a Roth IRA; which assets should be used to fund the Roth IRA; how much cash or cash-like assets you should keep available for your own use; and how to structure your Roth IRA (that is, whether to designate individual beneficiaries or a trust, for instance). In order to accomplish your personal and financial goals using a Roth IRA, you should contact an attorney experienced in both financial and estate planning.