These three questions merely scratch the surface of other factors that may need to be considered. Keep in mind that your estate at age 45 is likely very different from the one you’ll have at age 65 and 85 — your accounts change, you spend/inherit assets, and you gain/lose family members. The more complex your situation, the more you’ll benefit from working with a skilled financial adviser, tax specialist, and estate attorney.
If you are considering a Roth IRA, ask yourself these three questions:
1. Will your Roth outlive you? In estate planning, the top two reasons for Roth conversions are to bequeath tax-free assets and to reduce your taxable estate. It’s critical to project your spending lifestyle relative to your net worth to understand how your assets may be used in retirement. This allows you to see what assets are likely to be part of your remaining estate.
The MarketWatch article, "When a Roth conversion is right for your estate — and when it isn’t," explains that if you project you’ll spend all of your IRA assets in retirement, the decision to convert will be based on marginal tax rates over your lifetime. If you think your Roth will outlive you, make sure the conversion tax implications outweigh the long-term savings for the person who will inherit the account. If you throw the beneficiary into a higher tax bracket with the inheritance, he or she may be better off if you take the tax hit now at your lower tax rate. But if the beneficiary’s tax rate at the time of the inheritance will be lower than your current tax rate, conversion may not be worth it. Talk with your estate planning attorney about possibly leaving the assets in a traditional IRA.
2. Is there a plan to maximize the Roth benefit? If you plan well, the benefits of a Roth conversion could span multiple lifetimes, so it’s very important to communicate this to your spouse to extend the account’s tax-free growth.
3. Does your estate benefit a charity? Charities generally don’t pay any income taxes on donations, so a traditional IRA—rather than a Roth—is a terrific asset to leave to charity. When you own an IRA, it’s like you have a joint account with the U.S. Government, as taxes are owed on the money that’s distributed. However, when the account is transferred to charity, Uncle Sam doesn’t get anything. The charity gets it all! So, converting the IRA to a Roth and naming a charity as beneficiary would be a mistake by creating an unnecessary taxable event, a payable tax to the government, and would reduce the amount received by the charity.
These are just a few of the questions that can arise when talking about an IRA conversion. The more complex your circumstances, the more you’ll benefit from working with an experienced estate planning attorney.
Reference: MarketWatch (November 17, 2014) "When a Roth conversion is right for your estate — and when it isn’t"