September 18, 2015

Many retired individuals have access to both a tax-deferred account and a tax-free IRA. As a result, common advice from financial advisors includes suggestions for leaving the Roth behind to your children as it allows a tax-free withdrawal system over the course of their life. This is not always true, however. 

If you instead use the Roth for your own needs and set aside the traditional IRA for your children, they may ultimately get a bigger inheritance even after the income taxes on each withdrawal are factored in. The critical factor here is to compare your own tax rate with the tax rate of your beneficiary.

A child who has a lower tax rate than you do will be able to take a bigger inheritance if you leave them the traditional IRA. If the opposite is true, you may want to consider leaving the Roth instead. These calculations might be easy to accomplish when there is one heir to the retirement funds, but it becomes much more complicated when a parent has two or more children falling in different tax brackets. Make sure to set up an appointment with your financial advisor to determine how to best equalize the inheritances.

To learn more about passing on your retirement benefits and how to best accomplish this with estate planning, set up a meeting with our office today.