April 12, 2024

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If you’ve been sleeping on a Roth IRA (individual retirement account), now is the time to wake up and unwrap its full potential. Although the account garners a lot of attention for the tax-free withdrawals you can receive after you hit age 59 1/2, the benefits can stretch beyond you. Your Roth IRA can serve as a tax-free wealth-building vehicle for the next generation.
If you want to set your heirs up for financial success, here are some Roth IRA benefits and considerations to make the process a breeze.
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If you want to rack up a large sum of money to pass on to your heirs, you have to take advantage of annual contributions. For 2022, you can tuck away up to $6,000 in a Roth IRA if you’re under 50 and meet the income requirements. Once you hit 50, you can stash away an extra $1,000 in your account to beef up your retirement savings.
You can contribute the maximum amount to a Roth IRA as long as your income is less than $129,000 as a single filer and $204,000 as a married filer. After that, you enter the phaseout range and can make reduced contributions. When your modified adjusted gross income (MAGI) tips over the upper limit, you won’t be able to make direct contributions.
Here are the Roth IRA phaseout ranges you need to watch out for if you want to contribute the maximum amount to a Roth IRA.
2022 Income Phaseout Range
Single or head of household
$129,000 to $144,000
Married filing jointly
$204,000 to $214,000
Data source: IRS.
Maxing out your Roth IRA is a great way to boost your retirement savings. The next step is to invest in high-quality assets that align with your goals and risk tolerance so you can get closer to the million-dollar mark.
Let’s take a look at how much you can accumulate in your Roth IRA if you start maxing out your account at age 35.
At age 66, you’ll have over a million dollars in your account. All the money that remains in your account can continue to benefit from compound interest. There’s no limit to how much you can earn in a Roth IRA.
Roth IRAs don’t bother you with required minimum distributions when you reach a certain age. Unlike a traditional IRA, you can keep the money in a Roth IRA for as long as you want. This means your Roth IRA can enjoy years of tax-free growth.
If you need to tap into your Roth IRA during retirement, your distribution won’t jack up your tax bill. As long as you are at least 59 1/2 and have met the requirements of the five-year rule, every dime you withdraw from your Roth IRA is tax-free. There’s no need to add Roth IRA distributions to your taxable income if you’ve made a qualified distribution. You already paid your taxes in the year you contributed to the account.
If you don’t need to dip into your Roth IRA during your lifetime, your money won’t go to waste. Your heirs can benefit from your Roth IRA nest egg. Make sure you name them as beneficiaries when you open your Roth IRA. You can also update your Roth IRA beneficiaries as needed. Check your Roth IRA beneficiaries to ensure your funds will go to the person it is intended for.
Generally, your heirs can make distributions from a Roth IRA tax-free for 10 years. It’s a good idea to consult with your financial professional to discuss beneficiary designations. Leaving a Roth IRA to a minor can get complicated. If you are the recipient of a Roth IRA from a parent, you want to make sure you understand how an inherited Roth IRA works so you don’t lose your tax benefits.
The moves you make now can set your heirs up for a wealthy future. Start with your goals, and aim to contribute as much as possible to your Roth IRA account while you qualify. The money in your account can continue to grow tax-free during your lifetime without the worry of RMDs. If you don’t need to touch the money, your kids can enjoy your Roth IRA funds and use them to create another wealth-building opportunity for the next generation.
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