Things to Think About Before Making a Roth IRA Conversion

Old couple having coffee"The Roth IRA, with its unique tax advantages, can be a powerful financial-planning tool. However, rolling funds from a traditional IRA into a Roth is not the right move for everyone."

The Motley Fool's article, "5 Things to Consider Before Making a Roth IRA Conversion," says that although Roth IRA conversions are popular, there are a few key things to consider before moving forward. Here are the five considerations identified by the article:

  1. Your tax bracket. These days it's not unusual for retirees to be in a higher tax bracket during retirement. However, many of us have the option of investing in a Roth IRA, which doesn't offer an up-front tax break—but lets you withdraw funds in retirement tax-free. If you think you are going to be in a higher tax bracket when you retire, you might consider converting some or all of your retirement savings to a Roth before you retire. Converting some or all of your traditional IRA money to a Roth IRA will also give you some tax diversification in retirement to hedge against future changes in tax rates and related rules.
  2. Estate planning. One of the great things about a Roth IRA is that it isn't subject to required minimum distributions (RMDs) at age 70½, unlike a traditional IRA, where you must withdraw an IRS-mandated amount annually at that age. Plus, it's subject to income taxes. Roth IRAs can continue to grow tax-free for as long as you live, and if your beneficiary is your spouse, he or she can roll over the account and make the Roth IRA his or her own with the same rules (non-spousal beneficiaries are subject to an RMD, but that distribution isn't taxed). In addition, non-spousal beneficiaries can take the RMDs over their entire life expectancy. This is a terrific benefit for younger beneficiaries like children or grandchildren.
  3. Be ready for the tax hit. The big minus for a Roth IRA conversion is that any funds you roll over will be subject to income tax in the year of the conversion. That means older folks should consider whether they can cover the tax bill and generate enough investment growth to offset the impact. Plus, there may be other considerations—like estate planning—that become more important than "payback" concerns.
  4. College financial aid. If you have college-age children who will be applying for financial aid, you may want to avoid Roth conversions when their aid is calculated. The extra taxable income could affect their eligibility or the amount of aid.
  5. Stock market declines. A drop in the stock market may give you a great opportunity for a Roth IRA conversion and get you more bang for your buck. You will be converting a lower amount and paying less in taxes. If you're thinking about rolling over your traditional IRA, consider taking advantage of the stock market correction by converting a larger portion of your old account, or think of it as another way of "buying low and selling high."

Converting your traditional IRA to a Roth IRA is a powerful tool that can provide financial planning options for many. But before you make a Roth conversion, consider the pros and the cons.

Reference: Motley Fool (February 27, 2016) "5 Things to Consider Before Making a Roth IRA Conversion"


Paying the Estate Tax

Bigstock-Dollars-House-3639183One of the biggest headaches for executors of large estates is coming up with the cash to pay the estate tax. If the cash or other liquid assets are not a part of the estate, then other things might have to be sold that the testator would have preferred to have gone to his or her heirs. There is a way to avoid this problem.

Estate law lore is full of stories about things that had to be sold to pay the estate tax. Businesses, art collections, real estate, wine collections and much more have been sold so that money could be made available to pay the estate tax. However, there is a relatively simple way to provide your estate with enough cash to pay the estate tax: life insurance.

This was recently explained in the Wills, Trusts & Estates Prof Blog in "How Life Insurance Can Be Used To Help With Estate Taxes."

You can create an irrevocable trust and make it the beneficiary of a life insurance policy.

When the insurance is paid out, the executor of the estate can use the money to pay any estate taxes owed. It is important that the trust be irrevocable in order for the life insurance proceeds to not be included in the estate and also subject to the estate tax.

For this to work the trust must be created at least three years before you pass away. If not, then it will be considered as part of your estate.

Of course, life insurance is not the only way to provide liquid assets that can be used to pay estate taxes. Before rushing to create an irrevocable trust and buying a life insurance policy, talk to an estate planning attorney about your other options.

For more information about estate planning, please visit my estate planning website.

Reference: Wills, Trusts & Estates Prof Blog (October 15, 2015) "How Life Insurance Can Be Used To Help With Estate Taxes."


Estate Planning and Bitcoins

DownloadSome people treat Bitcoins like currency and spend them as such. However, planning for an estate that contains Bitcoins is different than planning for an estate that contains traditional currency in the form of dollars.

Bitcoins are very popular in some circles. The original premise was that Bitcoins were to be a digital currency that people could use on the Internet in the place of dollars.

A key benefit was that Bitcoins were to be untraceable and uncontrollable by any government.

That original premise has not entirely come to pass, but many people do have large amounts of Bitcoins either for use as a type of currency or as investments.

Recently the Wills, Trusts & Estates Prof Blog pointed out that Bitcoins need to be planned for differently in an estate plan in an article titled "Some Tips On How To Plan For An Estate Containing Bitcoin."

The tips include:

  • Although many people think of Bitcoins as currency, the IRS does not and has ruled that Bitcoins are property. The difference has potential tax consequences and must be planned for accordingly.
  • An estate planner needs to know specifically about any Bitcoins owned to ensure that they are planned for and not lost.
  • Bitcoins often require an encryption key and password for access. Consequently, those need to be passed on to the appropriate parties or transferring them to the intended beneficiary might not be possible.
  • A power of attorney should specifically state that the attorney in fact has the authority to manage the Bitcoins.
  • If Bitcoins are part of the assets of a trust, the prudent investor rule might require that they be diversified into other investments.

If Bitcoins are part of your estate, then contact an experienced estate planning attorney to ensure that they are identified and distributed as you intend.

For more information about estate planning, please visit my estate planning website.

Reference: Wills, Trusts & Estates Prof Blog (July 29, 2015) "Some Tips On How To Plan For An Estate Containing Bitcoin."


Effects of the Supreme Court’s Ruling on Same-Sex Marriage

AP_719473332572Last week’s historic Supreme Court decision, Obergefell v. Hodges, affirmed a constitutional right to same-sex marriage in all 50 states, opening up tax, estate planning and employee benefits opportunities for couples in the 13 states that have not permitted same-sex marriage. For one, same-sex married couples may be able to claim state income tax refunds. They no longer have to worry about state estate taxes at the death of the first spouse. And they may save on health insurance at work.

Forbes responded to the recent Supreme Court ruling with a very thorough article titled “Tax, Estate Planning, Benefits Opportunities After Supreme Court's Same-Sex Marriage Decision”  that describes its effect and the ramifications. Here are a few of the important changes that the Obergefell ­decision will have on tax and estate planning:

Income Taxes. Married same-sex couples will now be able to file joint state income tax returns. This usually means lower taxes than for two people filing individual returns. The article notes that the changes apply retroactively to open year tax returns. As a result, those couples who were married out-of-state should file for refunds for past years.


Gifts. One notable benefit of married status is that an individual can make unlimited gifts to their spouse without any federal or state gift tax liability. There are no federal gift tax bills now for same-sex couples buying a house. Now if they purchase a home together, even if each contributes a different amount towards the purchase price, they own the home jointly without gift tax issues.


Estate Planning. The Supreme Court’s decision means that same-sex couples can make use of the spousal exclusion in their estate planning. This lets spouses leave one another property without paying estate taxes when the first spouse passes away. A ruling last year gave the federal right to same-sex couples, and last week’s case extended it to the state level. Intestacy laws also now apply to married same-sex couples: they will be able to inherit property in the event that a spouse dies without a will.

Divorce. There are now no issues of support rights with same-sex marriages recognized. Also, where same-sex couples can get divorced isn’t an issue, as every state will grant a same-sex divorce.

IRA rollovers. The article advises to check IRA beneficiary designation forms, because when a spouse inherits an IRA, there’s a special exception that permits a surviving spouse to immediately take distributions until age 70½. This will stretch out the tax deferred payments over the surviving spouse’s lifetime and reduce federal and state income taxes.

For more information about estate planning, please visit my estate planning website.

Reference: Forbes (June 26, 2015) “Tax, Estate Planning, Benefits Opportunities After Supreme Court's Same-Sex Marriage Decision”

1 2

  • Fill in the form below to download your e-book

    Download your free Avoid These Five Common Estate Planning Myths e-book
  • This field is for validation purposes and should be left unchanged.