Ed Slott: How Roth IRAs Can Help With Estate Planning (2025)

Key Takeaways

• A Roth IRA can be accessed anytime for any reason and is tax- and penalty-free.
• With the Secure Act, a Roth IRA can continue to grow tax-free without RMDs until the very end of the 10-year period after it is inherited.
• If an older adult is considering converting a traditional IRA to a Roth IRA, it may be worthwhile if paying the taxes doesn’t change their standard of living and they’re planning on giving money to a nonspousal relative.
• A traditional IRA may be the best option if you’re planning on donating your IRA to charity.

Christine Benz: Hi, I’m Christine Benz from Morningstar. Most investors are aware that being able to take tax-free withdrawals in retirement is the key advantage of having Roth accounts. But tax and retirement planning expert Ed Slott argues that the accounts can be useful in the context of estate planning, too. He’s here to share his perspective. Ed, thanks so much for being here.

Ed Slott: Thanks, Christine.

Tax Advantages to Roth IRAs

Benz: You call the Roth IRA the Swiss Army knife of tax planning. I’m wondering if you can talk about what you see as the chief tax advantages.

Slott: Most people look at it one-dimensionally. Well, I get it. It’s a Roth IRA. I like the idea. It grows income tax-free for life. There are no required minimum distributions during my lifetime. I love that. You did have to pay the tax upfront but look what you get. You get tax freedom for the rest of your life and even 10 years beyond for your beneficiaries. They can pull it out at the end of the 10th year after death, the nonspouse beneficiaries, income-tax-free. So, that’s pretty much what people think about Roth IRAs and that’s what they are. But there are creative uses of that money. Piling up Roth IRAs really can help in a number of situations. I’ll give you some examples.

Education. Remember, Roth IRA contributions, the actual contributions—not the conversions or the earnings—can be pulled out anytime for any reason, tax- and penalty-free. I’ve seen situations where people deciding between 529s and this and that, which have all kinds of restrictions. Or sometimes the kids have built up their own Roth IRAs and they need money for school and they don’t want to take loans and things. Yes, the money’s for retirement, but younger people have more years to replenish it. It’s a nice easy way to take out the contributions totally income tax- and penalty-free like a savings account. If you need it, I’m not saying it’s the best strategy, but it’s available. It’s also available on the higher end. I had a client years ago that was worried about estate tax. In New York, we have a high estate tax and he was just over the limit. He was in his 90s already, and his son had called me because he was worried about it. He’s the beneficiary. Of course, he’s worried about it.

The father had plenty of money, obviously, so it didn’t affect him. And the son said, “How can we get some money out of his estate?” And I said, well, we looked at it apparently since Roths were created. This guy was brilliant. He was piling up the Roth. I forget how much he had, $6 or $7 million in a Roth IRA. And he was just over the estate limit. I said, “You’re not going to believe this. But if he wants, and he has plenty of money, he can write you a check as a gift for $5 million out of his Roth, absolutely income-tax-free. It comes out of the Roth totally income-tax-free. It can go to you as a gift and reduce his estate, totally gift-tax-free. And it’s free of estate tax because he’s under the federal exemption, and most states don’t have a state gift tax.” And he thought that was brilliant. It was brilliant. Look at the use of that money. Nobody thought of that. I thought the Roth stays in there. There was this mindset: No, you never touch a Roth. It’s growing tax-free. And, generally, that’s good advice. But they did that. And all of a sudden he had a much lower estate.

And even if he built up, it would take him a long time to build it back up. We got that money out to the son, who was also, I think, close to 70 years old at that point. And they still to this day couldn’t believe how could that all be tax-free, without paying any tax he just took $5 million out and gave it to me. No tax anywhere? No, because it came out of a Roth.

Another way to do that. We had another client had a similar situation, was worried about being over the estate tax limit also in New York. And we did a projection. And New York has a cliff tax. Some other states for state estate tax, not federal, have lower exemptions. Many states don’t even have a state estate tax. But the ones that do, they tend to have lower exemptions. And they have a cliff. So, once you go over it, you lose the exemption. So when New York’s state estate tax rate, they say the top rate is 16%. It’s more like 200%. If you go over the limits, I showed them that on an analysis. And he said, well, this is crazy.

What I’m going to do, and this guy was also 90 at the point, I’m going to convert $1 million of my IRA to a Roth. Because he was just over by about $400,000. He paid $400,000 on the tax for the Roth conversion at the time. That conversion, that payment of tax, lowers his estate enough to wipe out a projected $400,000 state estate tax. In other words, he got the state paid for the cost of his Roth conversion. So there are ways you can use it in the estate and gift area. It’s a very, like a Swiss Army knife. It’s a very usable vehicle when you see that it’s all tax-free.

Advantages of Inheriting Roth IRAs With New Secure Act Rules

Benz: Even for people who aren’t subject to the estate tax, which the federal threshold is currently very, very high, it seems like the new stricter rules around inherited IRAs and that 10-year rule, it seems like that would make Roth IRAs relatively more attractive as assets for one’s heirs to inherit. Can you talk about that?

Slott: Yes, those are the best assets to inherit because under this 10-year rule for beneficiaries, most beneficiaries, nonspouses, have to empty the inherited account now after the Secure Act by the end of the 10th year after death. Same thing with an inherited Roth, but they can keep that inherited Roth growing for the full 10 years. They never have to touch it and take out all that accumulated growth and compounding absolutely income-tax-free. I’ll tell you another situation where the Roth can really help. This is a sad situation, but anybody listening where a spouse has died during the year—a husband, a wife, and a spouse has died—that’s the year you want to do the Roth conversion. That can really help. Why? Let’s say the husband dies this year in 2025 and now the wife is the beneficiary, very common, they inherit everything. And the wife will probably, other than the differential in Social Security, have the same income that they had together.

But now she has to pay at single rates. She will the year after death, in most cases. But in this year of death, is the last year she can file married filing joint, get the benefit of joint return tax rates that she may never have again. Yes, she’ll have to pay a boatload of taxes converting everything, but she’ll love it. Remember, the taxes would have to be paid anyway, and she would be in much higher brackets filing single on virtually the same income. So, what’s the benefit of paying all the tax on the Roth conversion? First, she got it out on the last year of filing married filing joint rates. Now she has no IRA anymore, so she has no taxable RMDs. Her income tax will be low for the rest of her life. It won’t affect the Medicare surcharges and other items. The 3.8% tax on net investment income and other items that are tied to income. And she’ll have the freedom. She can do whatever she wants with that. No RMDs for the rest of her life. And if she needs the money, she takes it tax-free, keeping her income low. And when she dies, she can leave it to her children, who inherited Roth IRA to grow another 10 years after death. Those are some unique uses of Roth IRAs that most people don’t think about.

Should Older Investors Convert From a Traditional IRA to a Roth IRA?

Benz: One question I get a lot in this context, and I’m hoping you can tackle it, is for older adults, you just referenced the widow, but any older adults, a question is, am I too old to convert? I know a lot of older adults find themselves in the enviable positions of having more in their IRAs than they’ll ever spend in their lifetimes. The funds are mostly there for their heirs. Does conversion make sense in that context? And how should people approach whether the tax hit is worth taking to do those conversions?

Slott: When people ask me that, say, in their 80s or so forth, I say it only really makes sense if you’re doing it for your children or grandchildren and it doesn’t affect your standard of living, your lifestyle—if paying the tax won’t have an effect on you. If that’s the case, yes, convert. It could also reduce your estate, too, if you have a large estate by the taxes you pay. And really, what you’re doing is paying a tax the children would—and I say children, they’re adult children, they’re probably in their 50s and 60s anyway, and may themselves be in their own highest earnings years. And if they inherited a traditional IRA, who knows, they may have a kid in school getting financial aid, and all of a sudden they got this boatload of tax that throws them out for that. The best thing you can do for them, if you’re doing it for them, is to have them inherit a Roth IRA. So you can make that happen. In that case, it would be worth it at any age.

Why You Shouldn’t Leave Roth IRAs to Charity

Benz: Correct me if I’m wrong, but the benefits of Roth accounts from an estate planning standpoint are mainly for human beneficiaries, not charity. If someone is planning to leave a big chunk of their IRA to charity, it would be a mistake to convert from traditional to Roth, right?

Slott: Absolutely. Never leave a Roth IRA to charity. I’m not saying not to give to charity, but give them the bad stuff, not the good stuff. Give them the traditional IRAs that you never even paid tax on. Why pay tax? And then give the Roth IRA. The charity doesn’t care what they get. It’s all money to them. They don’t pay taxes. Never do a Roth to give to charity. Never do a QCD [qualified charitable distribution ] from a Roth. It’s almost impossible to do anyway because only pretax money qualifies. But Roths and charity don’t mix.

Benz: Ed, this has been super helpful. Thank you so much for being here to share your wisdom with us.

Slott: Thanks, Christine.

Benz: Thanks for watching. I’m Christine Benz for Morningstar.

Watch Ed Slott: Confronting RMD Confusion for Inherited IRAs for more from Christine Benz.