Estate planning is one of those things that virtually no one enjoys, but that just about everyone could be spending a little more time on. The term “estate planning” usually brings to mind a person’s last will and testament, and perhaps a power of attorney and one or more trusts that they may have created.
But consider for a moment when you fill out paperwork for practically any type of financial account, including investment accounts, IRAs, a 401(k) you may have at work, bank CDs and even checking accounts. Every one of these is going to ask you to name a beneficiary to your account. And naming beneficiaries on your financial accounts, including your self-directed IRA, is a form of estate planning.
The Differences Between Traditional and Roth Accounts
Let’s first briefly cover how a Roth self-directed IRA is generally regarded as being much more powerful for estate planning purposes than a traditional self-directed IRA.
One of the biggest differences between Roth and traditional accounts is that Roth accounts are not subject to the rules on required minimum distributions. For traditional accounts, these rules state that once the account holder reaches age 70½, they must begin taking certain minimum distributions from their account each and every year. The minimum amount is based on their age and life expectancy, as well as their account balance.
Many individuals have multiple retirement accounts and other sources of retirement income. Because they can continue letting the funds in a Roth self-directed IRA continue to grow, even after they reach age 70½, they’ll have more money to pass down to their heirs after death.
Spousal Heirs. A spouse that is named as the beneficiary of an IRA is in a much better position than a non-spousal beneficiary. This is because the spouse beneficiary can roll over the assets from the decedent’s IRA to their own IRA. This means that they can elect to be subject to whatever rules apply to their own account.
For example, if the deceased spouse had reached the age where they needed to begin taking required minimum distributions from their traditional self-directed IRA, but the surviving spouse is still age 60, that surviving spouse would no longer need to take those distributions. In fact, they’d only need to take the required minimum distributions once they themselves reach age 70½.
The rules for non-spouse heirs are not quite as flexible or generous, so an individual who wants to maximize the value of their estate can choose to leave their IRAs to their spouse, and leave non-IRA assets to their non-spouse heirs.
As you work through these issues, remember that you want to be sure to have other key documentation relating to your estate planning as well. Everyone should have a will, and most will also want to execute a power of attorney as well as a living will or health care proxy.