You are set in terms of your spouse being able to inherit the account and use it as their own. For non-spousal beneficiaries, the main issue is the five-year rule. As with any type of IRA or retirement account, make sure your beneficiary designations are current and that they reflect your desires.
For people with a Roth 401(k)
It’s important that you roll this account over to a Roth IRA once you leave your employer to avoid RMDs.
An additional consideration beyond the estate planning ramifications is the tax diversification a Roth IRA provides once you are retired. Your changing circumstances might merit using some or all of your Roth IRA to take tax-free distributions in retirement at some point, and you now have the flexibility to do this.
For people who can make Roth Contributions
Contributing to a Roth IRA each year can help build a Roth balance to pass on to beneficiaries. For those who have access to a Roth 401(k) account via an employer-sponsored plan or a solo 401(k) for the self-employed, contributing to a Roth 401(k) can offer a higher contribution limit with no income restrictions as with a Roth IRA. The amount in the Roth 401(k) can later be rolled over to a Roth IRA with no tax consequences, avoiding RMDs as well.
Roth IRA Conversions
A Roth IRA conversion is a strategy to consider for passing IRA assets to non-spousal beneficiaries either directly or as contingent beneficiaries upon the death of a surviving spouse. This is a viable way for people to prepay taxes for their beneficiaries.
Beyond prepaying the taxes, the five-year rule can come into play if you did not previously have a Roth IRA.
Whether or not a Roth IRA conversion makes sense as an estate planning tool depends on a number of variables, including:
Your current tax situation.
If you are in a high tax bracket, the amount due in taxes on the conversion may not be worth the ultimate tax benefits to the non-spousal beneficiaries. If you are in a relatively low tax bracket, this can be more beneficial. This situation might be the case if you have recently retired and is not yet taking Social Security benefit.
You are relatively young.
This might be someone in their 40s or 50s. This situation provides them with a potentially long time horizon for the converted amounts to appreciate in value and offset much of the impact of the taxes on the conversion.
In looking at the taxes that would be incurred by you on the conversion, it is important to weigh this against the estimated tax savings in the future from not having to pay taxes on the RMDs for the amounts converted.
Whether or not a Roth IRA conversion is both beneficial and desirable as an estate planning strategy can vary from year to year based on your tax situation and that of the overall family.