The tax-free nature of growth on a Roth IRA makes it a highly appealing investment account to hold, and a similarly appealing type of account to inherit. All else being equal, it’s clearly better to be the beneficiary of an account that will never be taxed than of one that will be taxed over time.
Yet there’s a caveat. A client who leaves a Roth IRA as an asset to inherit will have paid taxes to get money into the account — either through systematic after-tax Roth contributions spanning many years or through Roth conversions. Which means the benefit of inheriting a Roth IRA is actually more nuanced. If the original IRA owner has paid too much in taxes to create the Roth, the beneficiaries might be better off inheriting a traditional IRA and paying the taxes themselves.
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