Preventing Problems with Trustees and Beneficiaries in Texas Trusts
December 10, 2014Houston Estate Planning – What does a Texas trustee do?
December 13, 2014
A common question people have regarding their retirement plans is whether they should convert their traditional IRA to a Roth IRA. The answer depends on a number of factors that you should review with your financial planner and Houston estate planning attorney. When you convert a traditional IRA to a Roth IRA, you must pay taxes on the amount converted, which means there are several issues you need to consider before executing a conversion. A recent article on MarketWatch discusses some of the factors, such as:
Will your Roth outlive you? From an estate planning perspective, the two goals to accomplish with a Roth conversion are bequeathing tax-free assets and reducing your taxable estate. In order to accomplish this goal, you need to project your spending habits in relation to your net worth and in order to understand how quickly you will exhaust your assets. If you think you’ll eventually spend all of your IRA assets during your retirement, the decision is primarily concerned with marginal tax rates. In some cases, it may be best to wait until stop working to convert to a Roth IRA, since you are more likely to be in a lower tax bracket at that time. If you think that you will still have assets in your Roth when you die, then whether a conversion makes sense depends on what tax bracket you think your beneficiaries will be in when they inherit the Roth. If they will be in a higher tax bracket when they inherit the Roth, it may make sense to pay the taxes now in order to pass the assets tax-free to them upon your death.
Is there a plan to maximize the benefit of the Roth conversion? If carried out properly, a converted Roth can span multiple lifetimes and can grow tax-free for an extended period of time. You will need to make sure to coordinate the plan and the beneficiary designations with your estate planning attorney and financial advisor.
Will you name a charity as the beneficiary of your estate? Generally, a traditional IRA rather than a Roth is a good assets to leave to charity. This is because with a traditional IRA, you do not pay taxes on the money contributed to the IRA, and when you donate the asset to charity, the charity gets the full amount without having to pay any taxes.
There are other factors that need to be considered when deciding whether a Roth conversion is right for you, so it is a good idea to speak with your financial advisor and estate planning attorney before deciding whether it is a good fit for your estate plan.
Reference: MarketWatch (November 17, 2014) “When a Roth conversion is right for your estate — and when it isn’t“
