A lot of people like Roth IRAs for one reason: after-tax investing. When you make after-tax investments in an account, it gives you a lot of freedom. For example, with a Roth IRA, there’s no requirement for RMDs, or “Required Minimum Distributions,” at a certain point. You can let the account sit as long as you want, growing. And for anyone with an estate to think about, letting an account grow well into your retirement years might be the goal. That’s why it helps to know not only why Self-Directed Roth IRAs can help grow your wealth, but give you specific strategies for leaving behind a legacy for your loved ones. Let’s explain.

Beneficiary Designations and Distribution Rules

When planning your estate with a Self-Directed Roth IRA, you first need to know the lay of the land. There are specific rules about beneficiary designations and required minimum distributions (RMDs). For starters, let’s define “beneficiaries.” Beneficiaries are the individuals or entities designated to receive the benefits of your IRA after your death. Choosing your beneficiary is obviously a critical decision.

Under old rules, an inherited Roth IRA could offer benefits to these beneficiaries that lasted a lifetime. But the SECURE Act and SECURE Act 2.0 changed those rights to include only spouses, minor children, or those with disabilities or chronic illnesses. For example, siblings who are within 10 years younger of the deceased account holder can’t hold inherited funds in the Roth IRA for more than ten years, per Investopedia.

Let’s review. For Self-Directed Roth IRAs, the distribution requirements for beneficiaries are influenced by several factors, according to the IRS.

• The relationship of the beneficiary to the account owner: This includes whether the beneficiary is a spouse, minor child, disabled or chronically ill individual, or another person.
• The death date of the account owner: Specifically, whether the account owner died before or after 2019. That’s when the SECURE Act introduced changes to the RMD rules for beneficiaries.

Spousal and Non-Spousal Beneficiaries

A Self-Directed Roth IRA includes special rules for spouses. Knowing those rules can be critical for your estate plan. To quickly recap? If you’re a spousal beneficiary of a Self-Directed Roth IRA, you’ll have more options compared to non-spousal beneficiaries.

Here’s an example, per the IRS website. If the Roth IRA account owner died before their required beginning date, spousal beneficiaries have choices like delaying distributions until the deceased would have turned 72 or taking take distributions based on their own life expectancy.

For non-spousal beneficiaries, the rules are slightly different. If the account owner died after their required beginning date, non-spousal beneficiaries may take distributions based on the longer of their life expectancy or the remaining life expectancy of the account owner. Obviously, the choice you make here could have a dramatic impact on how the beneficiary collects money from the Roth IRA.

Inherited Roth IRAs

Inherited Roth IRAs come with specific rules regarding distributions. Generally, inherited Roth IRAs must follow the same RMD rules as inherited traditional IRAs. However, distributions from a Roth IRA are usually tax-free, given that the account has been open for at least five years. This tax-free status makes Roth IRAs a powerful tool in estate planning for obvious reasons. It allows beneficiaries to receive significant amounts without a substantial tax burden. And if you’re a beneficiary, being told you’re inheriting a Roth IRA can be uplifting news for that reason.

Clearly, Self-Directed Roth IRAs offer all sorts of options for retirement investing and estate planning. But we at American IRA recommend you talk to professionals to resolve your specific situation. And if you want to get the process started by opening your Self-Directed Roth IRA today, you can reach out to us. Give us a ring at 866-7500-IRA to learn more.