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Will converting to a Roth IRA improve an estate plan?

| Nov 22, 2014 | Estate Planning

Wills, trusts and powers of attorney are the tools that most New Jersey residents think about when it comes to estate planning. However, other tools are available that an individual can use to create an estate plan that meets his or her goals. One of them is a Roth IRA, but the decision to convert to it requires considering several factors.

The conversion to a Roth IRA is most often based on two considerations — reducing an individual’s taxable estate and being able to leave a tax-free asset to a beneficiary. In order to achieve one or both of these goals, a review of one’s current and future financial needs is necessary. If it is believed that the person will spend the assets in the IRA during his or her lifetime, the prevailing tax rates during that time should be the main consideration.

However, if there will be assets left to pass on, the tax rate of the beneficiary should be considered first. If one’s tax rate will be higher than the account holder’s rate when the IRA is inherited, it may be beneficial to pay the taxes now at the lower rate and convert to a Roth IRA. This might give the beneficiary more value from the asset later. However, if the opposite is true, conversion may not achieve any savings for the beneficiary.

If converting to a Roth IRA is determined to be the best way to improve a New Jersey resident’s estate plan, the timing can be critical. Waiting until he or she actually retires may provide a tax savings since most people’s post-retirement income is lower, which means a lower tax bracket. Since avoiding as much tax as possible is the goal of conversion, it only makes sense to wait until it is most advantageous for everyone involved. Seeking the advice and assistance of someone familiar with estate planning and its tax ramifications can help determine when that time will be.

Source: marketwatch.com, “When a Roth conversion is right for your estate — and when it isn’t“, Brian Vnak, Nov. 17, 2014

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