Feb 2018 Q and A

Q.

I’ve heard that Roth IRAs are best for people who expect the same or higher income during their working years as in retirement, while traditional IRAs work best for retirees who expect less income than when they worked. Is this true?

A.

If you know for sure that you’ll have less income in retirement, that’s generally true. But none of us have a crystal ball, and we can’t predict what taxes will look like years from now. One reason, aside from taxes, to consider a Roth IRA is that distributions are not required at age 70½. Traditional IRAs mandate required minimum distributions (RMDs) once you reach this age.

Q.

I will receive an inheritance from a living trust, which includes a life insurance policy that named the estate as beneficiary. Is the benefit tax-free?

A.

Life insurance is generally income tax-free and estate tax-free when passed directly to an individual named as beneficiary. However, life insurance owned by a revocable trust, like a living trust, is considered part of the estate and is typically subject to estate taxes. To avoid estate taxes, a trust’s owner should consider naming one or more individuals as beneficiary, or putting the life insurance policy inside an irrevocable trust.