A "Roth Conversion" is the process of moving assets from an IRA owner's traditional IRA to a Roth IRA. A conversion triggers the payment of all taxes due on the traditional IRA. However, inside the Roth IRA the assets grow, per current rules, with no further tax liability. Once in a Roth, there is no required minimum distribution beginning at age 70.5, and all future withdrawals are free of tax, even for the heirs. TIPRA, the Tax Increase Prevention and Reconciliation Act, signed by President Bush in 2006 made several changes to Roth conversion rules resulting in increased attention in 2010 to the suitability of a conversion for traditional IRA owners. The Family Firm has been reviewing the advisability of a Roth Conversion for clients with traditional IRAs.
Every client situation is unique, however a Roth Conversion may make sense in situations where:
- Tax rates for the client are expected to be significantly higher in the future. This includes, especially for high earners, consideration of new taxes from the 2010 health care legislation and possible expiration of previous tax rate reductions.
- A unique tax event that creates a sizable tax deduction is anticipated. This allows all or part of that taxable income from the Roth Conversion to be sheltered from tax.
- Complete financial security is highly likely and the client wishes to pay taxes that heirs would otherwise pay.
The Family Firm is in a unique position to evaluate these favorable circumstances as well as those that may make a Roth Conversion detrimental, such as:
- When there are insufficient liquid assets for taxes due on a conversion, or when taxes will significantly deplete liquid assets and eventually require draws from the converted assets, defeating the purpose of the conversion;
- When there are no heirs or if the bulk of the estate will go to charity;
- When the client's marginal tax rate is expected to be lower in the future;
- The timeframe is such that the converted Roth assets don't have time (due to shorter life expectancy) to recoup the tax paid.
We are discussing the feasibility of a Roth Conversion with clients and their tax advisors as appropriate.
