Definition of Estate

• The federal estate tax applies to all your assets--including cash, securities, retirement accounts, personal property and real estate--that pass to anyone other than your spouse. Roth IRAs are included in that total with no special treatment.
  
  

Taxable Amount

• Your heirs are liable for tax on any amount over the government exemption. That exempted amount was $3.5 million in 2009. The estate tax was allowed to expire for 2010, but the exemption is scheduled to drop to $1 million in 2011 and successive years with a tax rate of 55 percent. If your estate totals $900,000 plus $200,000 in a Roth IRA, your heirs would pay a 55 percent tax on $100,000 in 2011 and beyond.
  
  

Roth Advantages

• Because Roth IRAs are funded with after-tax dollars, the value of your estate for tax purposes will be lowered by the amount already paid in taxes. In addition, beneficiaries can make withdrawals from a Roth without additional taxes as long as the account is at least five years old.
  
  

Other Retirement Accounts

• IRAs, Keough accounts, 401ks and similar employer-sponsored retirement accounts can effectively be taxed twice--first as part of the estate, then again as part of the beneficiary's ordinary income upon withdrawals.
  
  

Special Roth Rules

• If the Roth IRA has been in effect at least five years, a non-spouse beneficiary is not subject to a 10 percent early-withdrawal tax and can withdraw earnings tax free, even if the beneficiary and the decedent are both younger than age 59 1/2. However, Roth beneficiaries are required to follow a required minimum distribution plan.