Barry Jamieson, CFP®, MA
Since their inception, Roth accounts have been a great saving vehicle for families planning for their retirement. This saving tool has also been a nice way for families to help their children get started with their own future planning. But do Roth accounts make any sense for families with children with disabilities? This article explores the pros and cons of Roth accounts and whether it is advantageous for special needs families to incorporate these accounts into their special needs plan.
What are Roth IRA accounts?
Roth IRAs, similar to regular IRAs, are taxed advantaged retirement savings accounts. Unlike regular IRAs, contribution to Roth IRAs are not tax deductible. Earnings from Roths, however, grow tax free. Withdrawals on the earnings from these accounts are tax and penalty free as long as long as the withdrawals are made after age 59 ½ (or other qualifying condition.) Withdrawals on contributions are tax free at any age because the account holder already paid tax on the contribution. The annual maximum contribution that can be made for either a IRA or Roth IRA is $5,500 ($6,500 for folks 50 and older) on work earnings. For workers with employers who offer retirement plans, there are income limits on when contributions can made. In 2018 this limit is $133K for singles and $199K for married couples. Importantly these income limits are much higher for Roth IRAs compared to regular IRAs. Also, unlike regular IRAs that have a mandatory minimum withdrawal requirement at age 70 ½, withdrawals don’t ever have to occur with a Roth.
ROTHs vs. ABLE accounts
If you are thinking that Roths offer similar advantages as an ABLE account you are correct. Both allow for tax free growth on your contributions. The similarity between these saving vehicles ends there. ABLE accounts offer much more flexibility in terms of contribution limits and when withdrawals can be taken penalty free. Most importantly, ABLE accounts are not considered a resource for Medicaid eligibility purposes while Roth accounts are. The one key advantage that a Roth account has over an ABLE account is that assets can be passed on to other family members tax free while ABLE assets will most likely go to the state Medicaid program after the death of the individual. Nonetheless, because of the eligibility protection that ABLE accounts provide, there is very little reason for the individual with a disability or family member to contribute directly to the individual’s Roth account if those same dollars could be contributed to an ABLE account.
Roth IRAs and Estate Planning
For the parents of the individual with disabilities, contributions to their own Roth accounts instead of the ABLE account may make sense if the parent has the ability to make a Roth contribution. Roth accounts give families the ability to make withdrawals tax free in retirement for whatever purpose, not just limited to the needs of the individual. Unused Roth funds can be passed on to the individual with a disability by designating the Special Needs Trust as the beneficiary. If drafted properly, funds coming from the Roth will be distributed tax free to the individual over their life time. Families may want to designate the Roth portion of their estate to other family members since the tax benefit of a tax free distribution is greater to those with higher taxable incomes.
In summary, Roth accounts may make sense for special needs families. They almost never make sense for the individual with disabilities because ABLE accounts offer the same tax advantages while protecting eligibility to Social Security and Medicaid benefits. For the parents of the individual with special needs, Roths may provide added flexibility in their retirement and estate planning. Residual funds from the Roth account upon the death of the parents can be made available to their loved one by designating the account to the Special Needs Trust.