A Clever Way to Cut Your Heirs' Income Taxes
While there's no telling what will happen once tax reform finally takes effect, for now, taxes are a major concern for those who are doing estate planning to pass on their assets to their loved ones. If you don't want to have large portions of the money you leave your heirs gobbled up by income taxes, you'll need to find a way to convert that money to a nontaxable form.
The money that you put into a Roth retirement savings account has already been taxed, whether it got there via contributions you made or as a rollover from a tax-deferred retirement savings account. Thus, everything in that account is now considered nontaxable for income-tax purposes. As long as the Roth has been open for at least five years prior to your death, the money in that account is immune from federal income taxes.
If you leave the money in your Roth account instead of spending it during your retirement, then after your death the account will go to the person you designated as a beneficiary. Once that happens, the account will be subject to the IRS's rules for inherited IRAs. The beneficiary will be required to start taking distributions based on their predicted lifespan (the IRS provides actuarial tables to use for calculating this required minimum distribution). Assuming that your beneficiary doesn't just empty out the account, the balance left in the Roth account will continue to grow tax-free, providing a bounty of untaxed income for years to come.
Source: Fool.com
