When most people think about Roth IRAs, they think about their own retirement: tax-free growth, tax-free withdrawals, and more flexibility later in life. But there’s another side to the Roth story that doesn’t get nearly as much attention, and for many families it may be the most valuable part.
A Roth can be one of the most effective ways to pass retirement savings to the people you love, with fewer tax headaches along the way. Here’s why, and what to think about if legacy is part of your plan.
The Problem With Inheriting a Traditional IRA
For years, many heirs could stretch withdrawals from an inherited IRA across their own lifetimes, keeping annual taxes relatively low. That changed with rules that took effect after 2020.
Now, most non-spouse beneficiaries who inherit a retirement account must empty it within a set number of years. With a Traditional IRA, every dollar they withdraw is generally taxable as income. And because many heirs inherit during their own peak earning years, those withdrawals can land on top of an already full paycheck, pushing them into higher tax brackets.
In other words, a large Traditional IRA can arrive with a large tax bill attached, and a relatively short window to deal with it.
How a Roth Changes the Picture
Inherited Roth accounts are generally subject to the same time limit for emptying the account. The big difference is what happens when the money comes out. Qualified distributions from an inherited Roth are generally tax-free, as long as the account has met its five-year holding requirement.
That means your heirs can often let the inherited Roth continue to grow for years and then take the money out without adding to their taxable income. For a child who’s in the middle of their career, that can make a meaningful difference in how much of your savings they actually keep.
Paying the Tax So Your Heirs Don’t Have To
Here’s the heart of the strategy. Money in a Traditional IRA will be taxed at some point, either when you take it out or when your heirs do. A Roth conversion simply chooses when, and by whom.
If you expect to be in a lower tax bracket than your heirs will be, converting some of your Traditional IRA to Roth during your lifetime means paying tax at your rate rather than theirs. Many families find it’s a trade worth considering, especially when conversions are spread across several years to avoid jumping into a higher bracket all at once.
There’s also a quieter benefit for larger estates. When you pay the tax on a conversion from money outside the IRA, those dollars leave your estate, while the full converted amount stays in the Roth for your beneficiaries.
No Required Distributions During Your Lifetime
Traditional IRAs require minimum distributions starting at a certain age, whether you need the money or not. Roth IRAs don’t require distributions during the original owner’s lifetime.
For people who don’t expect to need all of their retirement savings, that means the Roth can keep growing untouched, potentially leaving more for the next generation. It also gives you more control over your own taxable income in retirement.
Why This Matters for Alternative Assets
For self-directed investors, estate planning comes with a few extra layers.
Alternative assets like real estate, private notes, and LLC interests aren’t always easy to sell quickly. When heirs inherit these assets inside a Traditional IRA, they may face tax on distributions while still trying to decide whether to sell, hold, or manage the investment. Inside a Roth, there’s generally less pressure, since distributions don’t carry an income tax bill.
Valuation also matters here. The tax on a Roth conversion is based on the fair market value of the assets you convert, so getting a well-supported valuation is an important part of any conversion plan. (We covered why that matters in our October 26 article on FMV.)
Don’t Forget Your Beneficiary Designations
Here’s something many people don’t realize: your IRA generally passes according to the beneficiary designation on file with your custodian, not according to your will. If that form is outdated, incomplete, or missing, your savings may not go where you intend, and your heirs may lose valuable options.
It’s a good idea to review your beneficiaries after major life events like a marriage, divorce, birth, or death in the family, and every few years even if nothing has changed. If you’re considering naming a trust as a beneficiary, that’s a conversation to have with an estate planning attorney, since trusts come with their own set of rules.
Not Every Heir Is Treated the Same
The rules for inherited accounts depend on who inherits. A surviving spouse often has more options than other beneficiaries, including treating an inherited Roth as their own. Certain other beneficiaries, such as minor children or individuals who are disabled or chronically ill, may also be treated differently.
Because these rules vary so much, it’s important to plan with your specific beneficiaries in mind rather than assuming one approach fits everyone.
When Roth May Not Be the Best Legacy Tool
Roth isn’t the right fit for every part of an estate. If you plan to leave some of your retirement savings to charity, Traditional IRA dollars can often be a better choice for those gifts, since qualified charities generally don’t pay income tax on what they receive. And if your heirs are likely to be in a lower tax bracket than you are, it may make more sense to leave Traditional dollars in place. We explored more of these tradeoffs in our October 12 article, “When Roth Makes Sense & When It Doesn’t.”
The Bottom Line
A Roth IRA can do more than support your own retirement. For many families, it’s a way to pass on savings with fewer taxes, more flexibility, and less stress for the people you leave behind. Like any estate strategy, it works best when it’s planned thoughtfully, coordinated with your beneficiaries, and reviewed with your tax and legal advisors.
Want to learn more about how Roth fits into a self-directed IRA strategy? Reach out any time at hello@midatlanticira.com, or join us on an upcoming National Strategy Call.
MidAtlantic IRA, LLC is a self-directed IRA administrator and custodian, not an investment advisor. This article is for educational purposes only and is not tax, legal, or investment advice. Please consult your own tax and legal professionals, including an estate planning attorney, before making decisions about your accounts.