Individual retirement accounts, or IRAs, have become increasingly popular over the last few decades due in large part to the fact that employer sponsored retirement and pensions have all but become a thing of the past. If you have an IRA, or are thinking of opening one, you may wish to consider a Roth IRA instead of a traditional IRA.
In a traditional IRA, you are allowed to contribute a specific amount of money each year into the account tax-free. The funds in the account then earn interest, growing your investment over the years. At age 70 ½, IRS rules require you to take minimum distributions from a traditional IRA and those are usually taxed.
A Roth IRA operates under the same concept – you contribute money to the account and the money grows over time. The difference is that while the contributions are not tax-free, the distributions or withdrawals are tax-free. Moreover, in a Roth IRA, you are not required to begin distributions at age 70 ½. These two differences can make a Roth IRA an attractive estate planning tool if you believe that you will not need the funds when you reach retirement.
If you do not use the funds held in your Roth IRA, the account can be passed down to your beneficiaries upon your death. They, in turn, can withdraw the funds tax-free. Although you are only allowed to contribute $6,500 per year (if age 50 or older) to a Roth IRA, the funds can add up quickly and will provide a nice gift to a loved one when you die if you do not find that you need the funds during your lifetime.