Roth IRAs are included in your estate for estate tax purposes. Yes, the vast majority of Americans will die without owing any federal estate tax. But if you are one of the couple thousand Americans who have an estate over $20 million at the time of this writing (2018), your Roth will be included.
Now, with that said, everything you own will be included; Your Traditional IRA, life insurance, home, etc. A Roth is not unique. But it’s important to know that while a Roth is income tax free it’s not estate tax free.
“Ahhh, that’s no big deal Josh, we don’t have anywhere near $20 million.” I get it. You may not be that wealthy. But do you live in MA? NY? MN? PA? OR? All of these states, and a host more, have state estate tax and/or inheritance tax.
Roth IRAs will be part of the calculation to determine how much your estate owes in taxes to your state when you pass on.
Massachusetts, for instance, taxes your estate if it is greater than $1million. Not hard to get to that threshold in MA with property values so high. Have a decent sized life insurance policy and a house? Guess what??? In MA, you have a taxable estate!
If you have a Roth, it will be taxed as part of that estate. Just be advised.
As of a 2014 Supreme Court ruling, ALL non-spouse inherited IRAs are subject to creditors.
So, if you die and leave your IRA to a child who decides to open up a pizza shop and the pizza shop fails, his creditors will seek reprieve in what was your IRA, Roth or Traditional.
You may want to consider other options to simply leaving your retirement accounts outright to a child or grandchild if you feel there is a risk of a lawsuit.
Say your children are surgeons using risky yet cutting-edge procedures. Their malpractice premiums are through the roof. Why is that? Because they get sued all the time!
Plaintiffs will look to every asset your child owns for payment, including the Roth you left him or her.
This one is huge. And again, it not only applies to the Roth but to ALL tax-deferred accounts including annuities.
Let me explain what the Step-Up Basis means.
You buy a stock for $100 today. In ten years that stock is worth $1,000 and you get hit by that bus driver, again. When you die, the executor of your estate will capture the Date of Death (DOD) valuation of all your accounts on the day of your death.
In this case, this stock was worth $1,000 on your DOD.
The person you left the stock to could then sell it for $1,000 and pay no tax. That $900 gain escapes taxation. This is a huge benefit of the tax code that many taxpayers do not take advantage of.
Now, be advised, the step up in basis rules applies to any property you own outside a retirement/annuity account. A house, an investment property, a collectible item, anything you own that has grown in value above your initial cost will receive the step up in basis. To reiterate, this means your beneficiary’s basis is the value of that asset on the day you die.
It’s very easy to identify date of death valuations for investment accounts. Simply find out how many shares were owned and the price per share on your day of death. But what if the property is something that has no daily trade volume and price? In this case, your executor will want to engage an appraiser to determine the value. It’s very important to get appraisals done on all property where a value cannot easily be determin
