16 Nov Can I convert this IRA to a Roth to leave tax-free inheritance?
Q. My wife and I have traditional IRAs and a Roth IRA. The larger portion of the money is in our traditional IRAs. We are both in our mid 70s. I know for the traditional IRAs our hiers will need to withdraw the funds within 10 years. What do you think about us taking about about 10% of the accounts — about $40,000 — and paying taxes and moving the funds to a Roth? I think the tax burden would be lower for us than for our children. We would continue to take out Required Minimum Distributions.
— Planning for the kids
A. This is a great question and there’s a lot to consider.
You said you’re in your mid-70s, so we’re guessing you started your Required Minimum Distributions already.
A new law delays RMDs until age 72 for those who haven’t started distributions yet.
But the timing of when you take your RMD will impact your attempts to convert part of the traditional IRAs to a Roth, said Jody D’Agostini, a certified financial planner with Equitable Advisors/The Falcon Financial Group in Morristown.
“You must make sure to distribute the RMD first,” she said. “If you do not do this, any amount that is converted to a Roth IRA would be an `excess contribution,’ The IRS will charge a penalty every year that this money is in the Roth account.”
After that has been satisfied, you can certainly explore what amount makes sense considering the overall tax ramifications, she said.
It may take several years to justify the tax savings, D’Agostini said.
And, because the distribution would add to your income for the year, it could have a negative impact on the Medicaid premiums you pay.
You should also consider whether you have the cash to pay the tax on the conversion or whether you’d have to take extra funds from the IRA to cover the tax.
We understand you want to leave the Roth to your children, but you should be sure you will be able to cover your cash flow needs first.
There are no age limitations for a conversion to a Roth. But if you decide to make the conversions, the funds in the Roths will be subject to the five-year rule.
“You can withdraw contributions from the Roth without penalty at any age. After age 59 ½, you can withdraw contributions and earnings without penalty so long as your Roth account has been open for at least five tax years,” she said. “So, if you decide to take a withdrawal which includes earnings, you will be subject to a 10% penalty and income taxes on that portion.”
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This story was originally published on Nov. 16, 2020.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.