Most of the investors that I encounter know that a Roth IRA can be a powerful tool to build wealth for retirement. What they often don’t know is that a Roth IRA can also be a valuable tool for transferring wealth to the next generation.
If helping your heirs secure their future is a priority for you, a Roth IRA might be a valuable addition to your plan.
What is a Roth IRA?
A Roth IRA is a retirement savings account designed for low to moderate income savers. People with earned income under a certain threshold can contribute a certain amount to a Roth IRA each year.
While the funds are invested within the Roth IRA, they grow tax deferred.
When normal withdrawals are taken in retirement, those withdrawals are not taxed. In addition, unlike Traditional IRAs or 401(k)s, Roth IRAs are not subject to Required Minimum Distributions.[1]
Learn more about IRAs
Why use a Roth IRA to transfer wealth?
There are three key features that can make a Roth IRA a valuable wealth transfer tool.
Tax Deferral: As with other retirement accounts, the investments held within a Roth IRA grow tax deferred. Tax deferral acts a bit like fertilizer in a garden. It can help investments grow a little faster because there are no taxes due on investment gains or investment income as they are accrued which means more money can stay invested.
This also gives you the option to use less tax efficient strategies that may offer you a more robust return than a more tax efficient strategy could.
No RMDs: Most retirement accounts require the owner to begin taking money out of the account during their lifetime. Under current tax law, most savers will need to start taking Required Minimum Distributions when they attain age 73 (age 75 beginning in 2033).
This means that any funds held in such accounts will likely be diminished by taxes during the account owner’s lifetime. Funds held in a Roth IRA are not subject to RMDs so they may retain their tax deferred status for as long as the account owner lives.
Tax-free withdrawals: Normal withdrawals from Roth IRAs are never taxed. That means when your Roth IRA passes to your heirs and they are required to begin making distributions, those distributions will not be taxable.
Using a Roth IRA can set your heirs up to receive a highly tax efficient asset that has been able to compound, untouched by taxes, for possibly decades. That’s a powerful wealth building and transfer tool!
How can I access a Roth IRA?
There are three primary ways you can access a Roth IRA.
Direct contribution: For 2025, individuals filing as Single with an Adjusted Gross Income under $150,000 (under $236,000 for couples Married Filing Jointly) can make a full $7,000 contribution to a Roth IRA.[2] Savers who are aged 50 or over may contribute an additional $1,000.
If you don’t meet the requirements for a direct contribution, you still have options.
Conversion: An existing Traditional IRA can be converted to a Roth IRA upon the account owner’s request. But proceed with caution as a Roth IRA Conversion can result in a tax liability.
For example, if you have a Traditional IRA that has been funded entirely with deductible contributions, and you choose to covert that entire Traditional IRA to a Roth IRA, 100% of the amount converted will be taxed as ordinary income in the year of conversion.
That could push you into a higher tax bracket and will certainly result in a tax liability of some amount. Proceed with caution and plan carefully if you want to pursue the conversion of an existing Traditional IRA.[3]
Backdoor Roth IRA: This is a very popular option with younger investors who are also high-income earners. This strategy is available to any income earner, as long as the individual does not have any Traditional IRAs (or SEP/SIMPLE IRAs) holding pre-tax dollars.[4]
The Backdoor Roth strategy takes advantage of the ability to convert a Traditional IRA to a Roth IRA. There are three key steps:
- Make a non-deductible contribution to a Traditional IRA. Leave the funds uninvested.
- Open a Roth IRA (if you don’t have one already).
- Within a few days, convert your non-deductible Traditional IRA to a Roth IRA.
Because the Traditional IRA was funded with a non-deductible contribution and those dollars remained uninvested, there are no untaxed dollars being converted. This makes the conversion a non-taxable event.
It is wise to work with a Financial Advisor to execute this type of strategy as there are potential pitfalls that they can help you avoid.
Things to Consider
As with any wealth building, asset transfer, or retirement savings strategy there are some considerations to keep in mind. 
First, any amounts you place in an IRA – be it Traditional or Roth – will be difficult to access before you attain age 59 ½ so don’t contribute funds that you can’t afford to tie up for long periods of time.
If you are considering converting an existing Traditional IRA, do some homework to take advantage of the Pro Rata Rule. You’ll need to determine if any portion of the account is comprised of post-tax dollars. If so, you’ll need to document that fact to make sure you only pay taxes on the untaxed dollars that are converted.
Be aware of the IRA Aggregation rule, especially if you are considering a Backdoor Roth IRA.
Lastly, know that balances in a Roth IRA are still available to you in retirement. Though to make this wealth transfer strategy as successful as possible, it’s wise to leave your Roth IRA untouched for as long as it practical.
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Robert W. Baird & Co Inc does not give tax or legal advice. Please consult with your tax advisor when considering a Backdoor Roth or Roth IRA Conversion strategy.
[1] A Required Minimum Distribution (RMD) is the minimum amount an account owner is required to withdraw from their retirement account(s) each year. RMDs start for most savers in the year when they turn 73.
[2] There are other limitations on contributions which are beyond the scope of this article. Please consult your tax advisor to determine if you are eligible to contribute to a Roth IRA.
[3] Before deciding to execute a Roth Conversion, consult with your tax advisor and/or Financial Advisor.
[4] The IRA Aggregation Rule make a Backdoor Roth IRA unappealing for those with any pre-tax IRA balances. You can learn more here.
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