Many individuals have substantial IRAs, yet they have no need to tap the account for retirement income. Generally, they’ll take only required minimum distributions (RMDs) after age 70-1/2, to reduce the tax bill on unneeded income. This approach may result in a sizable traditional IRA being passed down to the next generation, who also must take RMDs. The income from the inherited RMDs would be added to their children’s other income, and might be taxed heavily.
A recent article in Financial Planning, titled "Estate Planning: Smart Roth Conversion Trick," explains that some individuals choose to have partial Roth IRA conversions so they remain in their current income tax bracket and decrease other taxes and charges. Along with a Medicare surtax and deduction phase-outs, Medicare Part B premiums are also part of the mix.
Medicare enrollees typically pay about $105 monthly for Medicare Part B. This covers doctor bills and some other medical expenses. However, seniors who have a modified adjusted gross income (MAGI) above $85,000 (or $170,000 on joint returns) will pay anywhere from roughly $145 to $335 a month for that same coverage. This is because Roth IRA conversions increase an individual's MAGI. The original article advises those in this situation to take an annual series of partial conversions now to thereby limit future taxes, as well as “stealth” taxes like extra Part B premiums.
A partial Roth IRA conversion reduces an individual’s traditional IRA, taxable RMDs, and the taxable account ultimately passing on to beneficiaries. The key is to plan to pay the income tax now—at a relatively low rate—instead of later at a potentially higher rate. Accordingly, it might be wise to start looking at this well before you are even thinking about RMDs.
This might sound a little confusing, and it can be. You should discuss your IRA situation and how it affects your retirement and estate planning with an experienced estate planning and elder law attorney.
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: Financial Planning (August 19, 2014) "Estate Planning: Smart Roth Conversion Trick"