converting part of a very large traditional IRA into a Roth
A client is very ill. The estate will have to file and pay an estate tax. 75% of the client’s assets are in an IRA account. Assuming the client meets the income test, what is the feeling about converting part of the traditional IRA into a Roth and pay some of the tax now. The beneficiaries are all relatively young and there is substantial growth potential. The immediate result will be a lower estate tax because of the income tax payment.
Thanks
Permalink Submitted by Alan Spross on Tue, 2007-12-04 03:02
Conversion can be a helpful strategy. The higher the estate tax bracket, and the lower the marginal tax rate of the owner vrs the beneficiary, the more effective a conversion will be in enhancing the value of the inherited IRA assets. Ed’s book indicates that this indirect benefit is sometimes represented as an estate tax benefit of a Roth IRA.
Of course, a young beneficiary with a low marginal rate could soon become a middle or high marginal rate taxpayer, so the benefits may be awhile in coming.
Permalink Submitted by Bruce Steiner on Thu, 2007-12-06 00:28
If the IRA owner is in a state that still has a state estate or inheritance tax, you’ll avoid the problem that absent a conversion, the income tax deduction for the estate tax only covers the Federal, but not the state, estate or inheritance taxes.
Regardless of the state, by converting and using the other assets to pay the tax, the IRA owner is effectively putting additional assets into the tax-free Roth environment.
The Roth is a more valuable asset for a GST exempt disposition.
If the IRA owner provides for his/her children in trust rather than outright (which our clients almost always do, to better protect the inheritance from the child’s potential creditors, including spouses, and to keep the inheritance out of the child’s estate for estate tax purposes), the Roth conversion avoids the compressed income tax rates on trusts (without having to make distributions).
The IRA owner should consult with competent tax/estates counsel, who can give him/her specific advice based upon the particular facts and his/her objectives. A forum such as this can be useful for general information, but not for specific legal advice.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL