Is it time to consider a Roth IRA as part of your estate planning?

Ever since passage of the Setting Every Community for Retirement Enhancement (SECURE)

Act by Congress, effective Jan. 1, 2020, financial and estate planners have been struggling with alternatives to allow parents and others who earned their traditional IRA’s and retirement tax qualified funds to pass them on to beneficiaries while mitigating the tax effect. The most serious impact of the new law is a requirement for most new recipient beneficiaries to cash out their newly acquired IRAs within 10 years.

That might sound harmless enough but the catch is that, in receiving distributions, the new beneficiary must pay those taxes that were deferred in the traditional IRA. The “old” law — that is prior to 2020 — essentially allowed required minimum distributions (RMDs) to be based on the life expectancy of the new beneficiary and spread them out over that time.

Not now. The anticipated tax bill for those who inherit large traditional IRAs is substantial.

One possibility in planning is to take a closer look at other alternatives both when setting up an IRA and in what is known as a “traditional IRA to Roth IRA conversion.” Roth’s might begin to make more sense over time.

There are exceptions to the ten year cash out. Spouses inheriting from their deceased wife or husband still are able to inherit as though the traditional IRA were his or her own and take RMDs based on his or her life own expectancy. Minors have special rules.

Disabled and chronically ill individuals should also receive an exclusion although the definition of disabled and of chronically ill could be strict. Also, often for those individuals, inheritance may be in trust. This factor generated discussion what kind of trust with clear preference for what are known as accumulation trusts vs. conduit trusts. The reasons why would take more print than is available in this column. However, for your average adult son or daughter or grandson or granddaughter who is not disabled or chronically ill inheriting a very large traditional IRA can have catastrophic tax effect not only for the taxes on the fund itself but because it can bump their income into a higher tax bracket.

Why or how might Roth IRAs be more involved in the planning process for retirement funds going forward? Again, this also involves more discussion than can be available in print but there are three issues that can be considered.

Remember — this is a generalized discussion only. Specific actions should only be taken under the advice of a knowledgeable financial professional who knows your individual needs and goals. Here goes.