Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

convert nothing. Perhaps Roth lovers and Roth haters should both consider partial Roth conversions.

Factors that incline towards doing a Roth conversion

Here are factors that can tilt the balance in favor of a Roth conversion.

A. If conversion is “cheap” or “free.” Whether a Roth conversion will “make a profit” involves a cost-benefit analysis. If the cost is zero the decision is easy—there are only benefits. Similarly, if the cost is very low, the benefits do not have to clear a very high hurdle for the Roth conversion to win the contest. This factor makes the Roth conversion decision easy for an individual who is in a zero tax bracket temporarily (due, for example, to a net operating loss from a business). This factor also tends to make the Roth conversion favorable if the plan to be converted consists substantially of “after-tax money.” B. Future tax rate expected to be higher. This factor favors a Roth conversion for a person whose personal tax rate is likely to go higher in the foreseeable future, either because of changes in his personal circumstances or because a general future tax increase is likely to apply to him. For example, a retiree whose annual gross income (including investment income and retirement plan distributions) is likely to exceed $250,000 (in the case of a married individual; $200,000 for a single person) in future years will be subject to the 3.8 percent surtax on investment income after 2012 (see ¶ 2.1.02 ), resulting in a marginal tax rate of 43.6 percent on such income. A Roth conversion at the 2010 top marginal rate of 35 percent could benefit this client. Since qualified Roth IRA distributions do not increase gross income, converting to a Roth could help keep the client’s future gross income below the threshold that would trigger the expected top future tax rate. Another example: When a married person dies, the surviving spouse often will continue to receive almost as much income as the couple received while both were living, but the tax rates applicable to that income will sharply increase when the surviving spouse is filing as a single individual compared with the “married filing jointly” rates that previously applied. This prospect could encourage a married couple to start doing Roth conversions while both are living, especially if one of them is not healthy. This factor is also at work in setting up Roth IRAs for young family members ( ¶ 5.8.06 (C)) and when a low-income parent converts to a Roth for the benefit of high-income heirs ( ¶ 5.8.04 (B)). C. Participant does not want or need RMDs. Money can stay in a Roth IRA much longer than in a traditional IRA, because of the different minimum distribution rules that apply ( ¶ 5.2.02 (A)). This factor makes Roth IRAs attractive to individuals who would prefer to preserve their IRAs intact for heirs, or who do not want to deal with the annual hassle and penalty risk of RMDs. D. Spend down “outside” assets. An individual concerned about potential creditors’ claims should consider the relative vulnerability of his assets outside vs. inside an IRA. If (based on the configuration of his assets, the nature of the potential claims, and applicable state or