You may end up in a situation come retirement where you need all of your savings to cover your living expenses. After all, many people do. But what if you end up in a different position?
It may be that you’ve managed to amass such a large amount of retirement savings that there’s no way you’ll ever spend it all in your lifetime. Plus, maybe you claimed Social Security strategically, so now you have a large monthly benefit coming your way that does a great job of covering your bills.
If you expect to have excess money in your nest egg during retirement, you may decide that you’d like to gift some of that wealth to your heirs down the line. And if that’s the case, there’s one specific retirement savings plan you should keep your money in.
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Choose the savings option with the most flexibility
Tax-advantaged savings plans like IRAs and 401(k)s make sense when you’re trying to build a nest egg. But if you have the goal of leaving a large chunk of your savings to your heirs, it pays to favor a Roth IRA.
Roth IRAs are the only tax-advantaged savings plan to not impose required minimum distributions (RMDs). RMDs, which kick in starting at age 72, force you to remove a percentage of your savings balance each year, depending on how much money you have and what your life expectancy looks like at the time (there are tables you can use to figure out your RMD amount each year).
If you don’t take an RMD, you face a really steep penalty — 50% of the amount you fail to withdraw. That’s a penalty you don’t want.
But if you house your savings in a Roth IRA, you won’t have to worry about RMDs. And you’ll also have the option to leave as much of your savings to your heirs as you want.
Should you plan to leave a large inheritance?
Leaving your loved ones with money is an extremely nice, generous thing to do. But you should always try to make a point to put your own financial needs first.
Also, if you’re sitting on a nice amount of wealth in retirement, chances are it’s because you worked hard to save and invest. This means you deserve to use a nice amount of that money to fulfill your retirement goals and make your senior years as pleasant and easy as possible.
But you might be in the fortunate position of being able to do all those things — enjoy retirement to the fullest spirit leave money behind to your heirs. And so in that case, a Roth IRA could be your ticket to meeting those objectives.
That said, funding a Roth IRA might require some careful tax planning. If you’re anticipating a very large nest egg in retirement, it may be because you’re a higher earner — one whose income makes it so you’re ineligible to contribute to a Roth IRA directly.
In that case, you still have options. You can put your savings into a traditional IRA and then do a Roth IRA conversion after the fact. That move, however, might require some planning because of the tax implications, so it’s a good idea to sit down with a financial advisor or tax professional to come up with a plan.
In fact, if you have the goal of leaving a large inheritance to your loved ones, it pays to discuss that with a financial professional, too. That person may have advice on how to best leave money to your heirs that doesn’t just include housing your retirement savings in a Roth IRA.
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