When you set up your Roth IRA, the brokerage asks you to name a beneficiary. The primary beneficiary or beneficiaries inherit the whole shebang when you die. If the primary dies before you do, the contingent beneficiary steps up to the plate and inherits in the primary's place. It's worthwhile to name at least one of each type of beneficiary.
Your beneficiary form trumps your will. Even if the will says your son inherits everything you own, your Roth goes to your primary beneficiary. If the primary dies, the contingent beneficiary also comes ahead of the heirs named in your will. If you didn't pick any beneficiary, the Roth may become the property of your estate. In that case, your will does control who inherits the assets. If you didn't leave a will either, state law dictates who gets the money.
Not naming a beneficiary is a bad idea. If your estate gets the Roth, whoever inherits it will have only five years to empty the account. As Roth withdrawals are tax-free, he won't have to pay extra income tax, but he'll lose lots of interest the assets would have earned if withdrawals were stretched out for years. Not naming a contingent beneficiary -- also called a secondary beneficiary -- is a mistake for the same reason.
Naming your spouse as primary beneficiary makes good sense. When your spouse is the only beneficiary, she can treat your Roth IRA as if it were her own. A lot of account owners choose their children as contingent beneficiaries. Contingent beneficiaries who inherit the account get exactly the same rights as if they'd been named primary beneficiary.
If you name a contingent beneficiary, this gives the primary beneficiary another option -- to disclaim the Roth. Disclaiming allows a beneficiary to opt out of inheriting so that the account passes to the contingent beneficiary. If, for example, your spouse is primary beneficiary and financially secure, but your child is contingent and struggling, disclaiming gets the money to the heir who needs it most. As the primary beneficiary never legally owns the money, there's no gift tax related to disclaiming a Roth.
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