Your friend may tell you about the income strategy that he’s building for his family with no tax liability.
It may be, says The Central Penn Business Journal, that he’s talking about his Roth IRA savings techniques and how beneficial its tax-free savings will be in his estate planning. The article, “There's more than one way to save in a Roth,” explains that what you save in a Roth IRA represents post-tax savings. It grows tax-deferred, and then in retirement, the growth that’s never been taxed can be distributed tax-free.
For those savers who anticipate being in a higher income tax bracket in retirement than they are now, the benefits can be significant. Even for those savers who think their tax rate today is higher, there are still worthwhile benefits to the Roth IRA.
Roth IRAs don’t require “minimum distributions” after age 70 ½, like traditional IRAs. Roths can also be passed on just like traditional IRAs in a tax-efficient way to beneficiaries. They supersede a will and avoid the probate process. This makes a Roth a helpful estate planning tool for transferring wealth. The savings made into Roth IRAs can be accessed five years after the initiation of the Roth—even if the owner is under 59½. Early distributions from the Roth may be free of penalties and double taxation, if they represent the investor’s savings into it.
Most 401(k) plans now come with traditional and Roth options. That means the best part about the Roth savings option is that it comes with nearly all of the benefits of the Roth IRA and a few more. 401(k) plans allow for significant annual participant savings ($18,000 or $24,000 for those over 50 years old in 2017). If the participant decides to save all of that in the Roth side of the plan, he can do so regardless of his family’s income, with a $24,000 limit in 2017 into a Roth 401(k) for those 50 years old or older, and the Roth IRA income limits don’t apply.
However, if you leave your money in a Roth 401(k) after age 70½, you’ll be required to take minimum distributions while you are living. Most investors roll their Roth 401(k) to a Roth IRA at retirement and avoid that the RMD requirement.
Reference: Central Penn Business Journal (July 14, 2017) “There's more than one way to save in a Roth”