Whom Should You Name as Your Roth IRA Beneficiary?

The Roth IRA has officially overtaken the traditional IRA as the most popular type of individual retirement account. In 2013, total Roth IRA contributions topped $6 billion, compared with a little more than $4.6 billion in contributions to traditional IRAs.1

The reasons for the Roth IRA’s popularity are clear. It offers certain tax advantages and flexible options that simply aren’t available with a traditional IRA. For example, while the traditional IRA offers tax-deferred growth and upfront deductions for contributions, the Roth IRA offers tax benefits on the back end. There are no upfront deductions, but your growth is tax-deferred, and all distributions after age 59½ are tax-free.

Additionally, the Roth IRA doesn’t have mandated distributions at age 70½, which are required in a traditional IRA. That means you can keep your assets in the Roth as long as you’d like, allowing them to accumulate in a tax-deferred manner. When you pass away, your beneficiaries can receive the assets tax-free.

Given the many advantages of utilizing a Roth IRA, it’s not surprising that many choose the account as a retirement savings vehicle or as a tool for passing tax-free assets on to their loved ones. However, many also face a dilemma with regard to the Roth IRA: Whom should you choose as your primary beneficiary?

At first glance, it may seem like your spouse is the obvious choice. After all, he or she may need those assets to cover retirement expenses. However, there are also compelling reasons to choose a nonspouse loved one. Below are a few things to consider with each option:


Why to Choose a Spouse as Your Roth IRA Beneficiary

For many, there may be no dilemma at all. Selecting your spouse as your beneficiary may be a no-brainer. This is likely the case if your spouse will need as many assets as possible to fund their lifestyle after you pass away. If so, you may be well-served by choosing your spouse.

Spouses also have some flexibility that other beneficiaries may not have. For instance, they can take the Roth funds in a tax-free lump sum, or use the funds to create a tax-free income stream. They can also simply assume the Roth account as their own, giving them full control of the assets and how they’re invested. Because of that flexibility, and because of your spouse’s financial needs, it may make sense to name your spouse as the primary beneficiary.


Why to Choose a Nonspouse Loved One as Your Roth IRA Beneficiary

While there are many reasons to choose your spouse as beneficiary, there are also reasons it may make sense to choose a nonspouse loved one, such as a child or grandchild. When nonspouses are named as beneficiaries, they don’t have the option of taking over control of the Roth, or allowing the funds to continue to grow in the account without taking distributions. They generally have to either take the funds as a lump sum or begin taking income from the account.

However, they do have an intriguing option available. Your nonspouse beneficiary can choose to “stretch” the required distributions over their life expectancy. The younger they are, the lower the annual distributions will be, as the funds will be required to cover their entire life span. That means more money will stay in the Roth and continue to grow on a tax-deferred basis.

Using this stretch option, your beneficiary can essentially create a tax-free lifetime income stream that could grow. That could be a valuable gift for a child or grandchild. You can even split the benefit among several loved ones so nobody is left out.


Why the Contingent Beneficiary is So Important

No matter whom you choose as your primary beneficiary, make sure you name one or several contingent beneficiaries. If your primary beneficiary dies before you, or at the same time as you, the funds will go to your contingent beneficiaries.

If you don’t have a contingent beneficiary, the funds are paid to your estate. This is a taxable distribution and may force your IRA funds to go through probate. That would essentially offset all the benefits of using the Roth in the first place.

Are you unsure of whom you should name as your Roth beneficiary? Or do you wonder whether your current beneficiaries are correct? Let’s talk about it. Contact us today at TB Financial. We can help you analyze your goals and develop a strategy. Let’s connect today and start the conversation.




This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

16238 – 2016/11/15

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