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Most estate planning strategies are aimed at leaving the largest amount of assets as possible for intended beneficiaries. This is why many people in Florida are utilizing Roth IRAs in their estate planning. Although avoiding taking any distributions from traditional IRAs can help to save money for the next generation, many times, at a certain point, it makes sense to partially convert to a Roth IRA if one is aiming to reduce income tax liability.
The problem with traditional IRAs is that they force a person to take out minimum distribution amounts once the person has reached 70-1/2 years of age. These distributions are counted as income for tax purposes. This can become a problem since, not only does it take away from the savings in the IRA, which would be left for one’s children, but the distributions may also bump a person into the next income tax bracket.
Also, when an IRA that has reached maturity is inherited by beneficiaries, the heirs are also required to take required minimum distributions. If the beneficiaries are in financially strong positions, they may not need the money from inherited IRAs right away. Therefore, they will be unnecessarily paying income tax on the distributions, which could reduce the amount available when they really do need the money. Partially converting to Roth IRAs before leaving one’s estate to heirs can help the next generation minimize tax liabilities since distributions from Roth IRAs are not counted as income.
However, utilizing Roth IRAs is just one part of a comprehensive estate planning strategy in Florida. There are other legal instruments, such as trusts, wills and powers of attorney, which could be useful in fulfilling one’s estate planning goals. Which legal instruments one uses and how one uses them will depend upon the specific facts of one’s particular situation.