This ability to keep the Roth IRA growing tax-free without being required to take distributions also makes it an excellent estate planning tool, because you can leave the entire IRA balance to someone else. Then even after death the tax advantages of the Roth continue because the IRA continues to grow tax-free. Although your beneficiaries (except for spouses) will be required to take distributions over their lifetimes, those withdrawals will be income tax-free as long as some basic requirements are met. This can be especially valuable for those taxpayers who don’t spend all their assets during retirement and whose beneficiaries are in a high tax bracket. This ability to pass a tax-free lifetime earnings stream to young beneficiaries has tremendous wealth-building potential long after your death.
The decision to convert to a Roth IRA ultimately depends upon whether it results in greater after-tax wealth over an investor’s lifetime and, in some cases, beyond. The primary variables that drive the decision are current vs. future tax rates, the source of funds to pay the conversion taxes and the investment period over which the IRA is allowed to grow. Taxpayers’ job is not done, however, until they identify the secondary but still important interactions that the Roth conversion can have on their finances. We’ll discuss those next week.
John Spoto is the founder of Sentry Financial Planning, LLC in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com .
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions.