convert to Roth or not convert
Client is 83 years old spouse is 82. They have 2 grown sons. He has $700,00 in 401k and $200,000 in a Roth IRA which was established in 1998. He does not need income and has funds to pay taxes. My thought is to roll funds from 401k into the existing Roth and than split the Roth IRA so each son wil have his own stretch Roth IRA when parents pass on. Does this idea make sense? If parents pass on before the 2011 and 2012 taxes are filed how will the tax returns & payments be handled.
Permalink Submitted by Alan Spross on Wed, 2010-04-21 21:12
It would make sense for the beneficiaries if they will continue to be in a higher tax bracket than the parent, but 350,000 of added taxable income in both 2011 and 2012 when tax rates may be higher than this year will result in the parent paying a high tax rate on the conversion. Perhaps a much smaller amount can be converted in which the parent can apply a lower marginal tax rate.
If the IRAs are left to the sons, the total conversion tax bill will be due no later than the year of the IRA owner’s death.
Whether this move makes sense for the parents or not depends on many other factors. Note if the children inherit the 401k, they can make their own decision whether or not to convert and how much to convert. They would not have that option if they inherited a rollover IRA.