Roth IRAs (Individual Retirement Accounts) are gaining traction as a key part of estate planning due to their tax-free growth on both contributions and investment earnings.
Unlike 401(k) plans, Roth IRAs don’t have a rule forcing you to take required minimum distributions (RMDs) while you’re alive, allowing the account to grow intact. This enables your heirs to enjoy tax-free withdrawals for years, provided they manage distributions properly and the account is transferred correctly.
Thinking about adding a Roth IRA to your estate plan? This is what you need to know about Roth IRAs, passing along a Roth IRA to your heirs, and 10 reasons why it’s a good idea (based on current U.S. tax and benefit rules).
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First, what is a Roth IRA?
What is a Roth IRA?
A Roth IRA is a type of individual retirement account you contribute to with after-tax dollars. The main benefit of a Roth is that your investments grow tax-free.
You can withdraw both your contributions and any earnings tax-free before you reach retirement age if you meet certain conditions — you must be at least age 59½ and have had the Roth account for at least five years. There are also income limitations to take into consideration.
10 reasons to leave your heirs a Roth IRA
Some people set up a Roth IRA with no intention of ever making a withdrawal. Instead, they invest in a Roth for the sole purpose of passing it to their loved ones.
Here are 10 reasons why leaving a Roth to your heirs is a good idea — both for you and your heirs.
1. Money grows tax-free
Unlike traditional IRAs, which let you deduct your contributions from your income taxes but require you to pay income taxes later in life when you make withdrawals, Roth IRAs let you grow your money tax-free.
Roths are funded with after-tax dollars. There is no age requirement for contributions, although you must be within the income limits to contribute to a Roth IRA. That means there's the potential for more money to grow in your account to pass to your heirs.
2. No required minimum distributions (RMDs)
Because you're not required to take minimum distributions (RMDs), from your Roth IRA, you can pass along more of your retirement savings to your heirs. However, this benefit is only reserved for the original account holder.
“Most non-spouse beneficiaries must liquidate an inherited Roth IRA within 10 years after the Roth owner's death,” says Patrick O'Leary, CFP®, CWS® and senior vice president and financial adviser at O'Leary Wealth Management at DA Davidson. “However, the heir has significant flexibility in the timing of the withdrawals. Funds can be withdrawn in a lump sum or over a period of years.”
If you fail to comply with RMDs, your heirs might be subject to significant tax penalties.
3. Divide inherited IRAs tax-free
The tax code allows your heirs to divide an inherited IRA tax-free into separate IRAs for each of your beneficiaries. When you, as the original account owner, die, each beneficiary can establish their own inherited IRA with their share of the account funds.
This can go a long way to eliminate family conflicts that can sometimes occur with a simple will.
4. Distributions aren't subject to the 10% rule
Distributions made to heirs after the death of the original owner aren’t subject to the 10% tax penalty, no matter how young the heir is.
5. The five-year rule doesn’t apply
Although the original owner of Roth IRAs might need to hold the account for at least five years to ensure all distributions are tax-free, distributions to beneficiaries will be tax-free regardless of how long the IRA was open or how long the heirs own the Roth IRAs.
6. Tax-free inheritance
With a Roth, as long as you meet IRS requirements, you can withdraw both contributions and any earnings tax-free.
“This benefit passes on to your heirs as well, because they won’t owe income taxes on withdrawals, allowing them to maximize the value of the inheritance,” says Todd Villarrubia at Wealth Planning Law Group
7. Spousal benefits
Without making changes to the Roth, a spouse can inherit a Roth IRA and become its account holder. This is called a spousal transfer. No taxes are owed on withdrawals from the Roth, and no RMDs are required until they pass it to others.
8. Long-term investment
Doug Carey, president at WealthTrace explains that if a Roth IRA is set aside for heirs, the time span for its eventual use of investment principal is longer.
“This means investing in more stocks than with a traditional IRA that you plan on using for spending. By investing for a long time, the growth over time should be larger than if those investments were in bonds or cash.”
9. Avoid probate
One reason to leave a Roth IRA to your heirs is to avoid probate — the legal process that validates a person’s will in court and allows the distribution of their assets according to the terms in the will, or state law if there is no will.
Probate costs can vary, but usually range from 3% to 7% of the estate's value, according to De Fonte Law.
With properly designated beneficiaries, your Roth IRA will be excluded from your estate in a probate process.
"Leaving a Roth IRA to beneficiaries allows for the passing of tax-advantaged wealth, says Joel Russo, LUTCF, founder and principal at NJ Retirement Planning. “It’s simply a tax-free inheritance.”
10. The possibility of no estate tax
Carey adds, “In most cases, Roth IRAs are not subject to estate taxes if they are under the federal estate tax exemption threshold. If your estate is subject to estate taxes, a Roth IRA can be a very good way to reduce estate tax liability for your heirs since it grows tax-free.”
Roth IRA rules for saving and withdrawing
A Roth allows after-tax contributions to grow tax-free until you start making withdrawals. These contributions aren’t taxed as income, but there are withdrawal rules you must follow that don’t apply to 401(k)s or traditional IRAs. Because your income was already taxed before it was invested in a Roth IRA, no tax deductions can be taken on your contributions.
Generally, any growth in your Roth account is tax-exempt. However, you could owe taxes if you don’t meet certain requirements. You might also end up paying a 10% early withdrawal penalty.
Roth IRA contributions
Roth contributions are the money you invest in an IRA. Earnings are the profits on those investments. Both your contributions and earnings grow tax-free. Contributions are also limited by tax filing status and your modified adjusted gross income (MAGI).
For 2025, you can contribute the full $7,000, or $8,000 if you are age 50 or older, if your modified adjusted gross income (MAGI) is under $150,000 (single) or $236,000 (married filing jointly). Partial contributions phase out up to $165,000 (single) or $246,000 (joint). You’re ineligible above those thresholds.
For 2026, the contribution limit is expected to remain $7,000 and $8,000, with income phase-outs likely rising slightly due to inflation adjustments. The official numbers will be released in late 2025. One of the many benefits of a Roth is that you can withdraw your contributions at any time and for any reason with no tax or other penalties.
However, these distributions might be subject to income taxes and a 10% penalty if you make withdrawals before the age of 59½, according to the IRS. You must also have held the account for at least five years. The five-year rule applies regardless of the age at which you open the account.
Roth IRA-qualified distributions
Qualified distributions are both tax- and penalty-free. A Roth IRA distribution is considered qualified by the IRS if:
- Your Roth meets the five-year rule
- You make no withdrawals until you are 59½
- Distributions are only taken due to a permanent disability
- Distributions were made by a beneficiary or your estate after your death
Roth IRA non-qualified distributions
If your withdrawals don’t meet the IRS guidelines for qualified withdrawals, they're considered non-qualified withdrawals, and you will pay taxes on earnings at your income tax rate, plus an additional 10% penalty for non-qualified withdrawals.
However, you can avoid the 10% early withdrawal penalty on Roth IRA earnings (even if under 59½ or the five-year rule isn’t met) in these IRS-approved exceptions:
- You're a first-time home buyer: Up to $10,000 lifetime for you, spouse, child, grandchild or parent.
- You have qualified higher education expenses: Tuition, fees, books, supplies for you, spouse, child or grandchild at an eligible school.
- You have a permanent disability: You’re totally and permanently disabled (medical proof required).
- By death: Paid to your beneficiary or estate after your death.
- For substantially equal periodic payments: Fixed payments for at least 5 years or until 59½ (whichever is longer).
- You have unreimbursed medical expenses: Exceeding 7.5% of your adjusted gross income (AGI).
- You're paying health insurance premiums while unemployed: If you’ve received unemployment compensation for more than 12 consecutive weeks.
- IRS levies your wages: The IRS seizes funds to pay tax debt.
- If you have a qualified reservist distribution: Active-duty military reservist called to duty for more than 180 days.
- If you give birth or adopt: Up to $5,000 per child within one year of birth or final adoption.
Leaving a legacy
Leaving a Roth IRA to heirs allows you to pass on tax-advantaged wealth to the next generation for years to come.
Make sure you designate a beneficiary or beneficiaries when you open the account, keep your designations up to date, and make changes over time if necessary.
Verify that your heirs know the rules regarding RMDs so they're not penalized. If you plan to use a trust, reach out to a financial expert knowledgeable about the rules of a Roth IRA.
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