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Roth Estate Planning Strategies

Larry — Tue, 05 May 2009 19:37:54 +0000

Roth IRA and Roth 401k Accounts and Roth Estate Planning Strategies

There are trade-offs when deciding whether to allocate contributions to Roth retirement savings accounts versus traditional retirement savings accounts that have deferred income taxation features. In the majority of personal finance situations, making 100% of allowable contributions to Roth retirement plans would probably not yield the greatest total wealth in retirement compared to making contributions to traditional retirement savings accounts — even after income taxes on distributions from traditional retirement accounts during retirement are considered.

When the lifetime net present value of Roth contributions is compared to the lifetime value of making currently tax deductible contributions into traditional IRA and employer sponsored defined contribution retirement plans, such as 401k, 403b, KEOGH, and other plan accounts, most often traditional retirement accounts yield higher lifetime wealth net of taxes versus Roth accounts. Reducing current taxation with traditional accounts is usually a better bet than eliminating future taxation with Roth accounts.

However, a Roth retirement account contribution strategy also provides estate planning benefits that traditional tax-advantaged retirement accounts do not. Sometimes these estate planning benefits can tip the balance toward making Roth account contributions. When you expand your total present value analysis to include the long-term value to a multi-generational family, then Roth assets can have significantly greater value for some people.

If Roth assets remain at death, there are very significant long-term multi-generational tax avoidance advantages. In such circumstances where it is likely that a person’s assets will be adequate to cover retirement expenses even with a very long life, then it can be advantageous first to live off of traditional retirement plan assets, which are subject to mandatory withdrawals and associated income taxation in retirement anyway. This means that over one’s lifespan, when retirement assets are adequate for the long-term, then a larger and increasing proportion of one’s future financial asset portfolio would consist of Roth assets.

Why Roth retirement accounts can have some very significant advantages over traditional tax-advantaged retirement accounts for estate planning purposes

If a family’s financial model indicates that there is a strong possibility that they will still have tax-advantaged account assets at death, then those assets should be Roth tax-advantaged account assets, where feasible. Roth assets can be inherited by children, for example, and those inherited Roth assets can also grow tax-free over the expected lifespan of the person inheriting the Roth account. Heirs have certain mandatory withdrawal requirements related to their expected lifespans, but those withdrawals do not trigger income taxation on any Roth account asset appreciation either during the life of their benefactor or during their life as the heir.

For example, this means that the middle-aged offspring inheriting Roth retirement account assets from an elderly senior citizen parent when that child is age 50 perhaps, could enjoy possibly another 40 years of tax-free Roth inherited account investment growth with an income stream along the way. Under US tax law, this middle aged child would be required to make mandatory annual withdrawals related to his or her life expectancy. Nevertheless, these inherited Roth account withdrawals would be non-taxable including any asset appreciation that may have occurred during the life of the parent or the life of the child.

Only when these withdrawn inherited Roth account assets have been reinvested into a taxable account AND those reinvested and now potentially taxable assets have later appreciated in that taxable account, would only this subsequent asset appreciation potentially be subject to either short-term capital gains taxes or to long-term capital gains taxes. Depending upon the tax-efficiency of subsequent investments within this taxable account, recognition of taxes on asset appreciation could be deferred for a very long time.

Therefore, if you are among the minority of US citizens who can reasonably expect to exit this life with substantial tax-advantaged account assets, then let them be Roth account assets, if possible. Inherited traditional tax-advantaged retirement accounts do not provide these very significant and valuable estate planning tax avoidance benefits provided by inherited Roth accounts.

The only thing one needs to overcome is the current payment of higher income taxes on Roth account contributions or traditional retirement account conversions to Roth accounts. You need to possess available cash to pay the taxes, and to have the confidence that your future asset accumulation will be substantial enough to justify paying more taxes now for even greater tax savings in the future on a net present value basis. And, your kids could be quite happy with what your leave behind for them in the form of inherited Roth accounts.

Roth retirement plan account rules are in flux

Prior to 2010, total income restrictions limited Roth account contributions to those of low to moderate earned income. This changed in 2010 as all income restrictions on Roth account contributions and Roth account conversions were eliminated. Whether income limits on Roth account contributions will be re-instituted in the future is obviously unknowable currently. But in the interim, those who want to make Roth contributions and do Roth conversions have a potential opportunity to improve their long-term wealth.

You should use a capable retirement investment calculator to better understand the potential size of your projected Roth retirement nest egg assets in the future and the trade-offs between Roth and traditional account contributions. You should find out whether you could be one of the minority of the US taxpaying population that could amass significant enough retirement assets to have a preference of holding Roth retirement account assets rather than traditional retirement plan assets. Do not just guess, because too much money is involved in the decision.

Incidentally, to figure out whether you are one of the minority with a reasonable chance of building substantial retirement assets, you need sophisticated home retirement planning software that can help you to figure this out for your particular financial situation and circumstances. We can help, because we offer the bargain-priced VeriPlan lifetime retirement planning tool spreadsheet application that makes figuring this out for you family straightforward. To learn more, just explore the various pull-down menus that you will find on the blue menu bar near the top of this page.

This retirement planning spreadsheet software fully automates Roth account versus traditional tax-advantaged account retirement planning calculator analysis capabilities. It provides integrated Roth IRA retirement calculator, 401k retirement calculator, and other retirement plan calculator projection capabilities that take into account your particular current and projected lifetime financial planning situation. You can use VeriPlan’s flexible retirement planning tools to evaluate the net lifetime value to your family of choosing any combination of allowable Roth and/or traditional retirement account contributions over your lifetime. These retirement tax calculator features are just a few parts of VeriPlan’s rich set of lifetime financial planning and retirement planning software capabilities.

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Also, see these Roth investment calculator articles:

Roth IRA Conversion Calculator

Evaluating Roth IRA Conversions

Roth IRA Calculators

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Roth IRA calculator tools are needed to devise an optimum lifetime financial plan

This free retirement planning calculator website publishes documents regarding how to develop a customized family financial planning strategy

The personal financial planning strategy postings on this free website give individuals and families important ideas about lifetime financial planning issues. Our publications help to clarify important topics associated with establishing better personal finance practices. In addition, to analyze your retirement planning alternatives, you should use the best retirement calculator tool with superior retirement investment projection capabilities. You can find that retirement calculator right here. Its name is VeriPlan. VeriPlan is an excellent all-in-one financial planning tool with early retirement calculator analysis capabilities and the best retirement investment software features available for your do-it-yourself lifetime financial planning needs.

Tax-Advantaged Retirement Investment Planning

Larry — Tue, 05 May 2009 06:07:17 +0000

Tax-advantaged retirement savings plans

You may have the opportunity to make investments into both individual retirement accounts (IRA) and into employer or self-employed tax-advantaged retirement plans, such as a 401k, 403b, 457, Keogh, Simple, or other employer sponsored retirement plan. In general, if your net wage and salary earnings after living expenses will provide enough free cash flow, most retirement investment advisers would recommend that you make the full contributions each year into both individual retirement accounts and employer tax-advantaged retirement investment plans throughout your years of employment up to when you retire.

Even when you find that your annual contributions to such individual and employer sponsored retirement plans would not reduce your current annual income subject to current income taxation, very often it still makes long-term retirement financial planning sense to make these IRA and employer plan contributions, since future appreciation of your tax-advantaged assets would be sheltered from ongoing taxation.

Academic studies also indicate that it usually only takes a few years of non-taxed investment growth within tax-advantaged retirement plans to overcome the 10% federal penalty for withdrawals before age 59 and 1/2. For the vast majority of people, it tends to be unlikely that they would need emergency access to these tax-advantaged assets in the few year period before their tax savings would reach the break-even point versus this potential early withdrawal penalty. Thus, from a variety of points-of-view, maximizing available tax-advantaged plan contributions year after year tends to be a better lifetime financial planning strategy.

Tax-advantaged retirement savings plan rules are complex

The complexity of US income tax rules related to individual retirement account and defined contribution employer sponsored retirement plans simply cannot be understated. The highly complex and confusing retirement investment tax mess that Congress has developed over time for US citizens to cope with is simply idiotic. Nevertheless, it is what it is, and all you can do is to try to understand the rules and to optimize your retirement investment strategy within these rules.

The best way to understand these topics yourself is to download Publications 560 and 590 from the IRS website. These tax publications are long and involved, so grab some coffee and dedicate a few hours to the task of learning about US retirement plan taxation. Grab some aspirin, if needed, but keep at it.

This can be a very valuable expenditure of your time, particularly if you have ever asked these questions: “how much do I need to save for retirement?” or “how long will my money last in retirement?” It does not take much reflection to realize that the answer to these questions would depend greatly upon whether your retirement savings account assets are “pre-tax” or “after-tax.” The pre-tax or after-tax income tax status of your retirement portfolio can make a huge difference in determining how much to save for retirement!

For those of you who are self-reliant and would like to find the answers for yourself, you really need an automated retirement savings calculator and retirement income calculator with sophisticated saving for retirement calculator functionality including fully integrated lifetime retirement tax calculator capabilities. (Here is a hint: poke around on the blue pull-down menu bar of this website, and you will find just what you need right here. The VeriPlan retirement planning software integrates, automates and hides these complex US tax-advantaged retirement investment plan rules, allowing you to stop guessing and to focus on making more optimal lifetime financial planning decisions.)

Traditional tax-advantaged employer sponsored plan and IRA contributions versus Roth retirement account investments

The multi-page article that follows provides information that will allow you to understand better the trade-offs between “traditional” and “Roth” tax-advantaged retirement accounts. Understanding the trade-offs between traditional IRA and 401k retirement contributions versus Roth 401k retirement plan contributions and Roth IRA contributions requires automated analysis of all the factors over one’s lifetime that impact this decision. Back-of-the-envelope calculations can easily be simplistic, incorrect, and deceptive. This decision can only properly be made with the assistance of a comprehensive retirement plan calculator tool.

If you do not have access to an IRA retirement calculator, 401k retirement calculator, or other retirement fund calculator that can do this analysis for you, you really should acquire such a retirement planning software tool. The dollar amounts involved can be very large over a lifetime, and the best retirement calculator can help you to determine the advantages of one choice over another. Following uninformed instincts and assumptions could lead you to pursue a highly sub-optimal retirement savings plan, and over your lifetime you might accumulate many, many thousands of dollars less than you could have saved with a more optimal tax-advantaged retirement investment strategy.

Generally, for the projected lifetime financial circumstances of the majority of Americans, a retirement plan calculator tool would develop lifetime projections indicating that it would be more advantageous to make contributions into traditional tax-advantaged retirement accounts rather that into Roth tax-advantaged retirement accounts. This tends to be true, whenever a person saving for retirement can take advantage of the current tax deductibility features of traditional tax-advantaged IRA, 401k and other retirement account investments. However, note that when retirement savers cannot a) take advantage of current tax deductibility to reduce their current taxable income and b) their earned income and cash flow still allows for some level of retirement plan contributions, then Roth contributions are preferred, if the tax rules allow the person to make Roth retirement plan contributions.

While a sophisticated and automated retirement plan calculator tool usually indicates that retirement savers should prefer to make traditional retirement plan contributions (versus Roth contributions) to reduce current taxable income, you should monitor the situation each year to understand the rules in effect in a particular tax year. Unfortunately, while tax-advantaged retirement plan account rules are already complex, some of the rules have been shifting from year to year. You need to keep paying attention to maintain an optimal tax-advantaged retirement savings plan strategy.

The following pages of this multi-page retirement financial planning article will provide some very useful information allowing you to understand better the trade-offs between “traditional” and “Roth” tax-advantaged retirement accounts. A subsequent article also discusses the estate planning and inheritance advantages of Roth retirement savings accounts, which can be very substantial, if your assets are likely to out-live you.

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