Roth IRAs are not only tax-friendly, but they can be inherited. This is a great way to avoid probate court and leave your loved ones money without the hassle and expense of transferring the money through probate.
While the subject of Roth IRAs could fill up a book, here are the basics about how Roth IRAs work.
Contributions to a Roth IRA, unlike a contribution to a traditional IRA, 401(k)s or Keogh, are not tax deductible. This may seem like a raw deal, but it's really not. The advantage a Roth IRA adds is that, unlike other retirement accounts, when you withdraw money from the account eventually, it will not be taxed. The best way to see the advantage is to think of a single dollar contribution. Under a Roth IRA, you owe taxes on that one dollar up front, but years down the road when that dollar has grown into say ten dollars, you don't owe taxes on those ten dollars. The opposite would be true for traditional retirement accounts. The advantage of a Roth IRA is further compounded by the fact that most individuals are in a higher tax bracket as they get older, making the savings even more dramatic.
Traditional retirement accounts can avoid probate by assigning a beneficiary for the account upon the death of the account holder, but often have additional requirements that minimize their usefulness when they are inherited. For example, traditional IRAs require the account holder to start withdrawing from the account at age 70 1/2, which obviously means less money in the account for any beneficiary of the account.
Roth IRAs on the other hand, have no withdrawal requirements. This means that if you do not need to withdraw money from it, you can simply let the money grow, significantly increasing the amount of money that a beneficiary receives when the Roth IRA is inherited.
Finally, creating beneficiaries for your Roth IRA is remarkably easy. Simply request a beneficiary form from the account custodian, and name whomever you want as beneficiaries of the account. The account does not need to be named in a will or trust; the beneficiary form itself is sufficient. Upon your death, the beneficiaries only need a copy of your death certificate and personal identification to claim the money in the account.