If you’ve been sleeping on a Roth IRA (individual retirement account), now is the time to wake up and unleash its full potential. Although the account is getting a lot of attention for the tax-free withdrawals you can receive after you turn 59½, the benefits may extend beyond you. Your Roth IRA can serve as a vehicle for tax-free wealth creation for the next generation.

If you want to prepare your heirs for financial success, here are some Roth IRA benefits and considerations to make the process easier.

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You can maximize your Roth IRA to boost your portfolio

If you want to accumulate a large sum of money to pass on to your heirs, you should take advantage of annual dues. For 2022, you can store up to $6,000 in a Roth IRA if you’re under age 50 and meet the income requirements. Once you hit 50, you can set aside an additional $1,000 in your account to bolster your retirement savings.

You can contribute the maximum amount to a Roth IRA as long as your income is below $129,000 as a single filer and $204,000 as a married filer. After that, you enter the phase-out range and can make reduced contributions. When your Modified Adjusted Gross Income (MAGI) exceeds the upper limit, you will no longer be able to make direct contributions.

Here are the Roth IRA phasing out ranges you need to watch out for if you want to contribute the maximum amount to a Roth IRA.

Filing status

2022 revenue phase-out range

Single or head of household

$129,000 to $144,000

Married filing jointly

$204,000 to $214,000

Data source: IRS.

Maximizing your Roth IRA is a great way to increase your retirement savings. The next step is to invest in high-quality assets that match your goals and risk tolerance to get closer to the million dollar mark.

Let’s see how much you can accumulate in your Roth IRA if you start maximizing your account at age 35.

  • Age: 35 years old
  • Annual fee: $6,000
  • Investment return rate: 10%

At 66, you will have over a million dollars in your account. Any money left in your account can continue to earn compound interest. There is no limit to the amount you can earn in a Roth IRA.

The required minimum distros won’t get in your way

Roth IRAs don’t bother you with the required minimum distributions when you reach a certain age. Unlike a traditional IRA, you can keep money in a Roth IRA for as long as you want. This means your Roth IRA can enjoy years of tax-free growth.

If you need to dip into your Roth IRA during your retirement, your distribution won’t increase your tax bill. As long as you are at least 59.5 years old and have met the requirements of the five-year rule, every penny you take out of your Roth IRA is tax-free. Roth IRA distributions do not need to be added to your taxable income if you made a qualified distribution. You have already paid your taxes the year you contributed to the account.

Give the gift of a Roth IRA

If you don’t need to tap into your Roth IRA during your lifetime, your money won’t be wasted. Your heirs can benefit from your Roth IRA nest egg. Be sure to name them as beneficiaries when you open your Roth IRA. You can also update your Roth IRA beneficiaries as needed. Check your Roth IRA beneficiaries to make sure your funds will go to the person they are intended for.

Generally, your heirs can make distributions from a Roth IRA tax-free for 10 years. It’s a good idea to consult your financial advisor to discuss beneficiary designations. Leaving a Roth IRA to a minor can get complicated. If you are the beneficiary of a Roth IRA from a parent, you want to make sure you understand how an inherited Roth IRA works so you don’t lose your tax benefits.

Unlock your generational heritage secret

The actions you take now can prepare your heirs for a rich future. Start with your goals and aim to contribute as much as possible to your Roth IRA account while you qualify. The money in your account can continue to grow tax-free for your lifetime without worrying about RMDs. If you don’t need to touch the money, your children can take advantage of your Roth IRA funds and use them to create another wealth-building opportunity for the next generation.