Leaving Roth to children?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
earlywynnfan
Posts: 110
Joined: Thu Nov 08, 2018 2:46 pm

Leaving Roth to children?

Post by earlywynnfan »

I'm not finding this discussed anywhere. As I understand it, one of the benefits of Roth vs. Trad. is that a Roth can be left to my children as a Roth IRA. My assumption is that if my spouse and I pass our tIRA's will have to be liquidated and split between the two kids.

Here is my question: since we have two kids, should we open two Roth accounts? It seems to me this would be much simpler for my estate, one kid gets each and neither has to be in charge.

A silly follow-up: if we are in RMD mode, then pass the Roths along, do the kids still have to take RMD's if they are under 70? Or can the Roth just sit there and grow with the clock re-setting?
Grt2bOutdoors
Posts: 23210
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Leaving Roth to childREN?

Post by Grt2bOutdoors »

Roth or Traditional IRA: if parent passes and beneficiary is minors, minor is required to take RMDs over their expected lifetime. Minor begins taking distribution upon inheritance, they can not defer until age 70. Distributions from inherited ROTH pass tax free, traditional IRA distribution are taxable.

Another source for what is permissible can be found at irs.gov
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
User avatar
Wiggums
Posts: 3128
Joined: Thu Jan 31, 2019 8:02 am

Re: Leaving Roth to childREN?

Post by Wiggums »

Here are the basic rules of thumb:

• If kids’ rates are higher, bequeath a Roth — they are, for example, business owners, lawyers, doctors and the like — then let the parents convert at their lower tax rates and leave the kids a Roth.

• If parents’ rates are higher, bequeath a traditional IRA. If, on the hand, the parents’ tax rates are higher — they have, for example, significant net worth and the kids are 20-somethings struggling to just get a job at all and are in bottom tax brackets — just leaving them a big pretax account and let them liquidate themselves at their own tax rates.
NotWhoYouThink
Posts: 3266
Joined: Fri Dec 26, 2014 4:19 pm

Re: Leaving Roth to childREN?

Post by NotWhoYouThink »

Here is my question: since we have two kids, should we open two Roth accounts? It seems to me this would be much simpler for my estate, one kid gets each and neither has to be in charge.
You and your spouse can each have Roth accounts, probably with spouse as primary beneficiary and kids as contingent beneficiaries, equally on each account. That way you don't have to make sure each account has the same value. Investment houses regularly split these accounts for beneficiaries, it's not a big deal.
Topic Author
earlywynnfan
Posts: 110
Joined: Thu Nov 08, 2018 2:46 pm

Re: Leaving Roth to childREN?

Post by earlywynnfan »

NotWhoYouThink wrote: Sun Mar 10, 2019 9:51 am
Here is my question: since we have two kids, should we open two Roth accounts? It seems to me this would be much simpler for my estate, one kid gets each and neither has to be in charge.
You and your spouse can each have Roth accounts, probably with spouse as primary beneficiary and kids as contingent beneficiaries, equally on each account. That way you don't have to make sure each account has the same value. Investment houses regularly split these accounts for beneficiaries, it's not a big deal.
So I don't have to worry about, say, the oldest being in charge and screwing over her sister? If they are 50/50 beneficiaries, Vanguard will do the splitting for them?

That makes it easier!
User avatar
RickBoglehead
Posts: 5608
Joined: Wed Feb 14, 2018 9:10 am
Location: In a house

Re: Leaving Roth to childREN?

Post by RickBoglehead »

earlywynnfan wrote: Sun Mar 10, 2019 10:02 am
So I don't have to worry about, say, the oldest being in charge and screwing over her sister? If they are 50/50 beneficiaries, Vanguard will do the splitting for them?

That makes it easier!
Correct. You make each 50/50 beneficiaries on each account, and Vanguard will ensure that each receives half of the funds.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
Topic Author
earlywynnfan
Posts: 110
Joined: Thu Nov 08, 2018 2:46 pm

Re: Leaving Roth to childREN?

Post by earlywynnfan »

Thanks!
retiredjg
Posts: 42772
Joined: Thu Jan 10, 2008 12:56 pm

Re: Leaving Roth to childREN?

Post by retiredjg »

earlywynnfan wrote: Sun Mar 10, 2019 8:53 am My assumption is that if my spouse and I pass our tIRA's will have to be liquidated and split between the two kids.
No. You can put 2 equal (or unequal if you want) beneficiaries on a tIRA as well. No liquidation required.
User avatar
Epsilon Delta
Posts: 8090
Joined: Thu Apr 28, 2011 7:00 pm

Re: Leaving Roth to childREN?

Post by Epsilon Delta »

earlywynnfan wrote: Sun Mar 10, 2019 10:02 am
So I don't have to worry about, say, the oldest being in charge and [stealing from] her sister? If they are 50/50 beneficiaries, Vanguard will do the splitting for them?

That makes it easier!
If one is a minor you should appoint a trustee or financial guardian whose duty is to ensure no foul play. If you don't name one the courts will appoint somebody, it could in theory be the older sister which might be bad. If they are both adults and you still worry about foul play you may need a trust. Or an education program for the naif.
HereToLearn
Posts: 686
Joined: Sat Mar 17, 2018 5:53 pm

Re: Leaving Roth to childREN?

Post by HereToLearn »

earlywynnfan wrote: Sun Mar 10, 2019 10:02 am
NotWhoYouThink wrote: Sun Mar 10, 2019 9:51 am
Here is my question: since we have two kids, should we open two Roth accounts? It seems to me this would be much simpler for my estate, one kid gets each and neither has to be in charge.
You and your spouse can each have Roth accounts, probably with spouse as primary beneficiary and kids as contingent beneficiaries, equally on each account. That way you don't have to make sure each account has the same value. Investment houses regularly split these accounts for beneficiaries, it's not a big deal.
So I don't have to worry about, say, the oldest being in charge and screwing over her sister? If they are 50/50 beneficiaries, Vanguard will do the splitting for them?

That makes it easier!
Confirming what others have posted above. I dealt with this recently after my mother died. I had been POA on her Schwab account, but POA ceased at death, so I couldn't have redirected the funds even if I wanted to. Each sibling had to open own brokerage, tIRA, and Roth IRA accounts, and Schwab transferred the monies into each individually. As executor, I uploaded death cert and whatever other paperwork was needed and told my siblings what they needed to do, but even if I had not informed them, I would not have been able to take their money.
Alan S.
Posts: 10164
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Leaving Roth to childREN?

Post by Alan S. »

When there are multiple beneficiaries, separate inherited Roth IRAs must be established no later than 12/31 of the year following the year of death. Otherwise, the younger beneficiary will have to take RMDs using the age of the oldest beneficiary. The loss of stretch falls solely on the youngest beneficiary.

Therefore, they need to take action sooner rather than later and risk missing the deadline. If any beneficiary is dysfunctional or has a poor relationship with the others, you might consider naming that beneficiary on a separate Roth IRA account. Of course, managing multiple accounts just for the convenience of beneficiaries is a burden for the Roth owner, so this is a trade off situation.
essbeer
Posts: 214
Joined: Sat May 09, 2015 6:23 pm

Re: Leaving Roth to childREN?

Post by essbeer »

Epsilon Delta wrote: Sun Mar 10, 2019 12:31 pm
earlywynnfan wrote: Sun Mar 10, 2019 10:02 am
So I don't have to worry about, say, the oldest being in charge and [stealing from] her sister? If they are 50/50 beneficiaries, Vanguard will do the splitting for them?

That makes it easier!
If one is a minor you should appoint a trustee or financial guardian whose duty is to ensure no foul play. If you don't name one the courts will appoint somebody, it could in theory be the older sister which might be bad. If they are both adults and you still worry about foul play you may need a trust. Or an education program for the naif.
Don't leave an IRA to a minor unless it can't be avoided. My kids were left one and we, as parents, can't even assume guardianship without going to court, posting a bond, and paying an attorney to justify our handling of the money EVERY YEAR. It's such a mess that it's almost not worth it, and we actually had to consider abandoning the money (which was almost 6 figures) and letting the money go to unclaimed property for the next 12 years, as the least costly option available.
User avatar
Epsilon Delta
Posts: 8090
Joined: Thu Apr 28, 2011 7:00 pm

Re: Leaving Roth to childREN?

Post by Epsilon Delta »

essbeer wrote: Sun Mar 10, 2019 5:09 pm Don't leave an IRA to a minor unless it can't be avoided. My kids were left one and we, as parents, can't even assume guardianship without going to court, posting a bond, and paying an attorney to justify our handling of the money EVERY YEAR. It's such a mess that it's almost not worth it, and we actually had to consider abandoning the money (which was almost 6 figures) and letting the money go to unclaimed property for the next 12 years, as the least costly option available.
I am not a lawyer and people should consult one.

Many years ago I was told that if you will money to a minor without further instructions the courts get very protective as you describe. I was told that if I appointed a guardian/trustee and give reasonable instructions the courts will respect those expressed wishes. That makes life much easier for the person managing the money. So my will had a couple of paragraphs qualifying "One eighth to my niece". Her parents were named, investing in the S&P 500 index was explicitly mentioned, as were various reasons the money could be spent before her majority. There was probably a trust of some kind in the verbiage. Of course that will was never tested, so it might have all gone horribly wrong.

I'm not sure how a will would deal with an IRA with a designated beneficiary, but an estate attorney should know how to do this, and how not to do this, in your state.
User avatar
FIREchief
Posts: 5852
Joined: Fri Aug 19, 2016 6:40 pm

Re: Leaving Roth to children?

Post by FIREchief »

I believe that leaving Roth dollars to an heir in a properly drafted qualified trust is the best inheritance that you can leave them. The Roth RMD's don't generate taxable income, and thus can remain in an accumulation trust for asset protection purposes without incurring inflated trust tax rates. IRS can't touch them and neither can a creditor/divorcing spouse. :beer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Spirit Rider
Posts: 13913
Joined: Fri Mar 02, 2007 2:39 pm

Re: Leaving Roth to children?

Post by Spirit Rider »

There is nothing inherently wrong with leaving a Roth IRA to minor children, just don't name them directly as a beneficiary or with a property guardian. Either way a property guardian you select or one named by the court will be under court supervision until age of majority and in most state can be a major complicated hassle.

You should always name either a UMTA Inherited Roth IRA account or a trust as beneficiary. As pointed out by FIREchief, Roth IRAs are particularly beneficial with a UTMA Inherited IRA account or trust as beneficiaries, because the RMDs are not taxable income subject to Kiddie Tax rules if distributed or trust tax rules if retained. Which under the TCJA changes are exactly the same.
malabargold
Posts: 590
Joined: Fri Aug 08, 2014 8:16 am

Re: Leaving Roth to children?

Post by malabargold »

Teach your kids how to save, invest, and spend wisely.

Dumping a pile of money on them without an a
“user’s manual” and some practice may not be much of a gift otherwise.
3funder
Posts: 1513
Joined: Sun Oct 15, 2017 9:35 pm

Re: Leaving Roth to children?

Post by 3funder »

That's what my wife and I plan to do (many years from now).
Global stocks, US bonds, and time.
Post Reply