When you retire, you may find yourself in a situation where you will need all of your savings to cover your living expenses. After all, a lot of people do. But what if you end up in a different position?
You may have managed to amass such a large amount of retirement savings that it is impossible for you to spend them all in your lifetime. Plus, you may have strategically claimed Social Security, so now you have a sizable monthly benefit to help cover your bills.
If you expect to have excess money in your nest egg during retirement, you may choose to gift some of that wealth to your heirs. And if so, there is a specific retirement savings plan you should keep your money in.
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Choose the most flexible savings option
Tax-efficient savings plans like IRAs and 401(k)s make sense when you’re trying to build a nest egg. But if your goal is to leave a large portion of your savings to your heirs, it pays to favor a Roth IRA.
Roth IRAs are the only tax-efficient savings plan that does not impose required minimum distributions (RMDs). RMDs, which come into effect from age 72, require you to withdraw a percentage of your savings balance each year, depending on how much money you have and your life expectancy at that time. (there are tables you can use to determine your RMD amount each year).
If you don’t take RMD, you incur a very hefty penalty – 50% of the amount you don’t withdraw. It’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 be able to leave as much of your savings to your heirs as you want.
Should you consider leaving a significant legacy?
Leaving money to your loved ones is an extremely pleasant and generous thing to do. But you should always try to put your own financial needs first.
Plus, if you’re sitting on a nice fortune in retirement, it’s probably because you’ve worked hard to save and invest. This means you deserve to use a good portion of that money to achieve your retirement goals and make your retirement years as enjoyable and easy as possible.
But you might be lucky enough to be able to do everything these things – make the most of your retirement and leave money to your heirs. And so in that case, a Roth IRA could be your ticket to achieving those goals.
That said, funding a Roth IRA can require careful tax planning. If you’re anticipating a very large nest egg in retirement, it may be because you have a higher income — income that prevents you from contributing directly to a Roth IRA.
In this case, you still have options. You can put your savings in a traditional IRA and then do a Roth IRA conversion after the fact. However, this move may require some planning due to the tax implications, so it’s a good idea to sit down with a financial advisor or tax specialist to come up with a plan.
In fact, if your goal is to leave a significant legacy to your loved ones, it’s also beneficial to discuss this with a financial professional. This person may have advice on the best way to leave money for your heirs that doesn’t just include housing your retirement savings in a Roth IRA.
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