Should we convert to Roth IRA’s?
Just digging into this:
1. My wife and I are both 69 and have high six-figure IRA’s.
2. We file a joint 1040 in the 25% bracket.
3. Wife has four kids and 12 grandkids, aged 10 to 22 (second marriage).
4. I have two kids and will not have any grandkids.
Would someone please point me to where I can read up on this particular challenge? Or, if it’s a no-brainer, please tell me what you think in each case with your reasoning. My gut feeling is to hold on to mine with no conversion. Gut is a little upset in my wife’s case. Thanks so much for your help.
Permalink Submitted by Bruce Steiner on Mon, 2008-03-10 02:14
There was a flurry of articles on Roth conversions when it it first came into effect about 10 years ago, though most of them weren’t very good. This wasn’t really the best topic to write about, since people with income over $100,000 (which means most clients), can’t convert. But since this restriction goes away beginning in 2010, I and others will be writing about it again in the next couple of years.
The conversion makes sense for most people who have other money with which to pay the tax on the conversion. If you convert, you are effectively making a substantial additional contribution to your IRA, where the investment income and gains are tax-free. You also avoid required distributions during lifetime, and you have a more valuable asset to use for a credit shelter or GST exempt disposition. You avoid the problem in decoupled states that the Section 691(c) deduction for the estate tax only covers the Federal (but not the state) income tax.
On the other hand, you can’t make gifts of IRAs; and if you’re planning to leave your IRA to charity, if you convert, you’re incurring an unnecessary tax.
The tradeoff is often between converting all at once, which gets more money into the tax-free environment sooner, but may bunch the income into a higher bracket, or spreading the conversion out over a number of years.
A forum like this can be useful in providing general information, for specific legal advice as to whether YOU should convert, especially given the amount involved, you should consult with your own attorney, who can give you specific advice based upon your particular situation and your objectives.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Alan Spross on Mon, 2008-03-10 02:58
Yes, the conversion decision can be very complex, but the complexity itself varies based on your individual situation, and also your estate plans. The following link provides 60 pages of analysis:
http://tax.cchgroup.com/images/fot/JORP_10-03-07_Keebler-Bigge.pdf
Permalink Submitted by Bruce Steiner on Mon, 2008-03-10 13:52
That article is a start, but there’s much more that will no doubt be developed in future articles, probably beginning in late 2009 or 2010.
The basic math is straightforward. Assume a constant 30% tax bracket. You have a $100 IRA and $30 of other money. You convert and use the $30 of other money to pay the tax. Over some period of time, your $100 Roth IRA grows to $200. If you did not convert, your $100 IRA would grow to $200, or $140 after tax. But your $30 taxable account would grow to something less than $60, since you’d pay some tax along the way on the investment income and gains.
There are other advantages to the Roth conversion, which were previously noted.
The tradeoff is that the conversion can bunch the income into a higher bracket. So the analysis often becomes whether the benefit of the conversion is enough to outweigh the income tax cost of the bunching. And the choice is often between converting all at once at the cost of the bunching, or spreading the conversion out over a number of years.