Craig Wear, a financial planner, explains how the 10-year rule for inherited IRAs forces large taxable withdrawals that can consume a third or more of the account. Roth accounts offer a tax-free alternative for leaving money to heirs.
What kind of tax situation are you leaving behind for your heirs? Under current rules most heirs have to empty inherited IRAs within 10 years. That means large forced withdrawals, often at very high tax rates. So here's a silly visual to drive the point home. Let's say you work your entire life building a beautiful house for your family, something that would still be a gift to them long after you're gone. But after you pass the government comes takes the front door, the windows and the roof. Now your gift is nothing but a shell of a house. It's nothing like what you intended to be your legacy for your family. It is shockingly easy for a third or more of an IRA to end up going to taxes. So without strategic planning it can turn out to be just a tax nightmare. When money is in a Roth, nobody ever pays taxes on it. Your gift is able to be given exactly as you intended doors, windows and all.
