Learn from the past, set vivid, detailed goals for the future, and live in the only moment of time over which you have any control: now.

– Denis Waitley

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Use of the Roth IRA in estate planning

The process of estate planning consists of a review and analysis of your retirement accounts, including traditional IRAs, Roth IRAs or merely your employer’s 401(k) retirement account. It is imperative that you consider all available options because the account you choose can make a difference in subsequent years. For example, it is important to determine whether the accounts are taxable or non-taxable, and the time at which the funds will be accessible.

The Roth IRA is one retirement account that offers much flexibility. You can hold the account independently, or your employer can choose to provide it as part of your retirement plan. The Roth IRA is a kind of retirement account in which you pay taxes now on the funds deposited into the account. Upon withdrawal of the funds, you will not owe any taxes. The Roth IRA is different from the traditional IRA in which you pay taxes upon the withdrawal of funds during your retirement years.

There is a maximum amount that you can contribute annually, but you can open an account at any age. Funds in a Roth account provide a specific amount that you can use to calculate retirement income. In addition, it is flexible in that it can lengthen the payment stream, and enable you to withdraw funds prior to reaching retirement age. It is also deductible on your tax return provided you meet specific qualifications.

If you are considering opening an IRA account, you should be aware of the eligibility requirements and the maximum amount of income you may earn in any given year. The allowable contribution differs every year. In 2016, you can contribute as much as $5,500. However, if you earned an amount that is less than the maximum, then you can only contribute the amount you earned during that tax year. For instance, if you earned $4,000 in 2016, then your allowable contribution into a Roth IRA is $4,000, and not the maximum amount of $5,500.

There are many benefits to having a Roth IRA. If you hold a Roth IRA account for five years, you can withdraw any amount contributed without incurring tax consequences. In addition, you are entitled to special relief in the event you die or become disabled. Furthermore, if you are a first-time homebuyer, you can withdraw a maximum of $10,000 to apply toward a down payment. Moreover, you are not required to withdraw funds when you reach a certain age, as is the case with a traditional IRA, which mandates that you start withdrawing funds at age 70. A Roth IRA is a great estate planning tool in that it enables you to establish a tax-free income for your heirs that they can extend throughout their lifetime.

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