ROTH CONVERSIONS FOR ELDERLY CLIENTS
Have some clients in their mid 80s that only take the RMDs from their IRAs because they are reguired to & they paid no income taxes in 2010 & same deal for 2011. I am contemplating evaluating doing some ROTH conversions for them, either up to the point where they will still pay no income taxes, or perhaps beyond if results in minimal taxes & have separate cash to pay tax.
I am not aware of anything that would preclude them from doing as much ROTH converting as they want. Are there any issues that I should focus on to ensure they are eligible to convert at will?
Input is greatly appreciated!
Permalink Submitted by Alan Spross on Wed, 2011-11-09 23:33
Converting is a no brainer if it can be done without a tax liability. For this age group converting up through the 10 and 15% brackets is often analyzed in terms of the benefits to their beneficiaries, including the estimated tax brackets the beneficiaries would pay if they inherited a TIRA vrs a Roth IRA. It may not pay for clients to pay a higher conversion tax rate than their beneficiaries would pay if they inherited a TIRA.
Another factor to consider is their long term care plan and current health. If they are self insured for this exposure they would generally convert LESS than if they have LTC coverage. Many LTC expenses and all nursing home expenses are deductible as medical less 7.5% AGI, so TIRA distributions would be the first account to tap if the taxable income would be offset by medical deductions.
RMD %s accelerate quite quickly after the mid 80s, so if the IRA is large this can produce higher tax bills in the future. Conversions at -0- or 10% will reduce future RMDs and therefore can save future tax dollars.
As always, the taxpayer must complete their current year RMD before converting anything, because the first dollars distributed are deemed to be the RMD and the RMD cannot be converted.
Permalink Submitted by Bruce Steiner on Wed, 2011-11-09 23:51
If they’re in their mid-80s, they may want to convert each year beyond the 15% bracket. As Alan pointed out, they might want to consider their beneficiaries’ expected tax brackets. If they want to provide for their beneficiaries in trust rather than outright (to keep the inheritances out of their beneficiaries’ estates, and to better protect against potential creditors, including spouses), the tradeoff is that trusts reach the top bracket quickly. But the Roth avoids that tradeoff.