• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Home
  • Our Firm
    • About Our Firm
    • Attorney and Staff Profiles
    • Speaker Connection
  • Services
    • Asset Protection & Business Planning
    • Elder Law & Medicaid Services
    • Estate Planning Services
    • Financial Planning Assistance
    • Incapacity Planning
    • IRA & Retirement Planning
    • Legacy Planning
    • LGBTQ Estate Planning
    • Pet Planning
    • Probate
    • SECURE Act
    • Special Needs Planning
    • Wills & Trusts
  • Elder Law
    • Coping with Alzheimer’s
    • Guardianship and Conservatorship
    • Medicaid Crisis Planning
    • Medicaid Planning
  • Seminars
  • Webinars
  • Resources
    • Communities We Serve
      • Keller, Texas
    • Elder Law Resources
      • Elder Law & Medicaid Definitions
      • Elder Law Reports
    • Estate Planning Resources
      • 3 Reasons to Create a Trust
      • Estate and Gift Tax Figures
      • Estate Planning Articles
      • Estate Planning Definitions
      • Estate Planning Reports
        • Advanced Estate Planning
        • Basic Estate Planning
        • Estate Planning for Niches
        • Trust Administration
      • Estate Planning Worksheet
      • Is Your Estate Plan Outdated?
    • Free Consultation
    • Free Estate Planning Seminars
    • Frequently Asked Questions
      • Estate Planning
      • Trust Administration & Probate
    • Newsletters
    • Our Client Care Program
    • Pre Consultation Form
    • Professional Resources
      • Educational Alerts
  • Reviews
    • Our Reviews
    • Review Us
  • Contact Us
  • Blog

McGee Law Firm

Your Resource for Estate Planning, Elder Law and Medicaid / VA Planning

Call Us Today 817-899-3286
  • Facebook
  • Instagram
  • LinkedIn
  • YouTube
Attend a Free Seminar
Home / Estate Planning / Basics of Estate Planning: Choosing a Roth or Traditional IRA (or 401k)

Basics of Estate Planning: Choosing a Roth or Traditional IRA (or 401k)

June 12, 2018 by Brandon McGee

Roth and Traditional accounts each have their merits. This blog examines the differences between the two.

Blog Author: Stephen C. Hartnett, J.D., LL.M. (Tax), Director of Education,
American Academy of Estate Planning Attorneys, Inc.

This is another in a series of blogs on the basics of estate planning. In this blog, we’ll look at the differences between a Roth and a traditional IRA (or 401k). We’ll also look at considerations in choosing between them.

With a traditional IRA (or 401k), you make a contribution and that amount is not included in your taxable income for the year. Contributions are limited to $5,500 (plus $1,000 if over age 55) for an IRA (or $18,000 (plus $6,000 if over age 55) for a 401k). When you take distributions from the traditional IRA (or 401k), the amount of the distribution, which may include the original contribution or earnings thereon, is taxed as ordinary income. Generally, Roth IRA (and 401k) distributions are not taxable, including all the earnings on the contributions.

With either one there are penalties for taking distributions prior to age 59 ½, unless an exception applies. With a traditional IRA (or 401k), you must start taking required minimum distributions once you reach age 70 ½, while with a Roth IRA (or 401k) you need take no distributions during your lifetime. This makes the Roth much more flexible from an income tax planning perspective. After death, the same rules apply regarding distributions to beneficiaries. Of course, the Roth distributions will not be included in the beneficiary’s income while the traditional distributions will be.

Generally, if you expect your taxable earnings and rate of taxation to be lower in retirement, you may lean toward contribution to a traditional account. On the other hand, if you expect the rate of taxation to be higher years down the road in retirement, you may lean toward a contribution to a Roth account.

Assets in a traditional or Roth 401k are completely exempt in bankruptcy. Assets in a traditional or Roth IRA are exempt in bankruptcy up to at least $1 million. Thus, if you have asset protection concerns, you’ll likely want to maximize your contributions. Effectively, by using a Roth vehicle, you are contributing greater value to the plan because each dollar contributed has the taxes pre-paid. Whereas with a traditional vehicle, the future income taxes have yet to be paid. Thus, if you have $100,000 in a traditional vehicle and it will be taxed at 30% upon withdrawal, the after-tax value will be $70,000. On the other hand, if you have $100,000 in a Roth account, even after distribution it is still worth $100,000.

If you have a taxable estate, you may want to consider a Roth vehicle. Let’s say you have an estate that exceeds the estate tax exclusion by $500,000. Thus, your estate would pay $200,000 in estate tax (after a 40% federal estate tax). Let’s say part of your portfolio is a $1,500,000 traditional IRA. Let’s say you could Roth that IRA by taking it into income and paying 1/3, or $500,000, in tax (perhaps over a couple years). By doing so, you would bring your estate down to the exclusion amount and remove the estate tax problem without reducing the value of your assets. Basically, all you’ve done is pre-paid the income tax you or your beneficiaries would have to pay, and by so doing, you would have saved $200,000 in estate taxation.

There are many advantages to saving for retirement. Carefully consider whether a traditional or Roth IRA (or 401k) is right for you or your client.

In upcoming blogs, I’ll discuss more on the basics of estate planning.

  • Author
  • Recent Posts
Brandon McGee
Brandon McGee
Brandon McGee enjoys a successful law practice focusing on estate planning, elder law, Medicaid preplanning and crisis planning, and probate. Brandon and his team combine legal skills with compassion and understanding to develop estate plans that are personalized to the needs of each of their clients.
Brandon McGee
Latest posts by Brandon McGee (see all)
  • Common Mistakes in Estate Planning - March 16, 2023
  • How to Conduct an Estate Plan Review - March 15, 2023
  • What Happens When You Don’t Trust Your Trustee – Part I - March 14, 2023

Filed Under: Estate Planning, Legal Education

About Brandon McGee

Brandon McGee enjoys a successful law practice focusing on estate planning, elder law, Medicaid preplanning and crisis planning, and probate. Brandon and his team combine legal skills with compassion and understanding to develop estate plans that are personalized to the needs of each of their clients.

Primary Sidebar

Blog Subscription

Sign up for our estate planning blog to receive all of our latest news and updates!

  • This field is for validation purposes and should be left unchanged.

Follow us

  • Facebook
  • Instagram
  • LinkedIn
  • YouTube

TESTIMONIALS

Client Review
May 25, 2021
    

Brandon McGee is knowledgeable, experienced and professional regarding Estate Planning. The entire process of multiple meetings to establish our input, draft and sign documents and fund the Trust were well organized and clearly explained. At completion, we were presented with a very well organized binder with the documents (both paper and electronic) and lists for future action.  In short, we find Brandon McGee and his staff to be competent, professional and friendly. ~ Brian C.

default image
Brian C.

Fort Worth Address

Fort Worth
810 W. 10th Street
Fort Worth, TX 76102
United States (US)
Phone: (817) 899-3286
See Larger mapGet Directions

Fort Worth Map

map

Southlake Address

Southlake
101 River Oaks Dr., Ste. 110
Southlake, Texas 76092
United States (US)
Phone: (817) 899-3286
See Larger mapGet Directions

Footer

  • Advantages of Working With our Firm
  • About the American Academy
  • Disclaimer
  • Sitemap
  • Contact Us

Connect to Us

  • Facebook
  • Instagram
  • LinkedIn
  • YouTube
footer logo

© 2023 McGee Law Firm
All Rights Reserved