Year-End Strategies-Handout #2 - Roth IRAs: A Wealth Transfer Strategy

Handout #2 - Roth IRAs: A Wealth Transfer Strategy

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This document discusses Roth IRA conversions as a strategic wealth transfer tool for high-net-worth individuals with Traditional IRAs or 401(k) plans they do not need for retirement. Traditional IRAs require minimum distributions (RMDs) starting at age 73, and distributions to heirs are taxed as ordinary income. This can be inefficient, especially if heirs are in higher tax brackets.<br /><br />Converting to a Roth IRA eliminates RMDs and allows the owner to pay taxes on the conversion now, potentially at a lower rate, enabling a larger, tax-free inheritance for beneficiaries. The example of Elizabeth, age 73, illustrates that converting a $100,000 Traditional IRA to a Roth IRA (paying $22,000 tax on conversion) can leave her child a greater after-tax inheritance compared to leaving the account as a Traditional IRA with or without reinvesting the RMDs.<br /><br />A Roth IRA conversion may benefit those who: want to leave assets tax-free; do not need funds from the traditional IRA for retirement; have outside assets to cover conversion taxes; have large tax deductions; or plan to leave IRA assets to a trust. Roth IRAs have no RMDs for the owner, allowing assets to grow longer tax-free, although inherited Roth IRAs do have RMDs.<br /><br />However, a Roth conversion may not benefit individuals close to retirement, those with annuity contracts in IRAs, people nearing Medicare enrollment (due to tax income affecting premiums), or those expecting heirs in lower tax brackets.<br /><br />The tax cost of conversion can be significant, possibly pushing clients into higher tax brackets. Withdrawals before age 59½ may be taxed and penalized. The document stresses consulting tax and legal professionals for individual situations. Transamerica provides educational information and can assist with beneficiary designations to control asset distribution after death.

Keywords

Roth IRA conversion

Traditional IRA

401(k) plans

required minimum distributions

tax-free inheritance

high-net-worth individuals

tax brackets

retirement planning

estate planning

beneficiary designations