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Roth Conversion for 86-yr old?
Old 03-21-2010, 03:06 PM   #1
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Roth Conversion for 86-yr old?

I'm thinking of doing a Roth conversion of part of my 86-yr old mother's TIRA and I'd really like to get some advice on whether this makes sense. She already has a Roth and this would add to it.

Some factors:
1. Longevity -- My mother has vascular dementia, is visibly declining, and is not likely to live until 100.
2. Ability to pay taxes -- No problem here. Money is available in her taxable account and will not impede her ability to pay for her care. For a few years now my mother has been cashing in some deferred assets (non-qualified annuity, EE/I bonds...) to pay the tax on them. A yearly allotment is built into her budget.
3. Ability to pay for care -- No problem here. Her WR including the yearly extra taxes from #3 above is <1% because she is able to live on her SS and pension. Assuming her expenses increase substantially when she has to move to a memory unit in the same non-profit continuing care community, she still has enough money.
4. Tax rate -- My mother's current tax rate is probably the same as1/3 her beneficiaries and less than the other 2/3. For purposes of this decision, I am assuming future higher income tax rates rather than some sort of VAT.

Reasons I see for doing a partial conversion while maintaining her current marginal rate:
1. Save the state estate tax of 4.5% which is applied before the income tax on an IRA is paid.
2. Reduce overall income tax paid by family by paying at my mother's current rate rather than the higher rates of most of the beneficiaries.
3. Allow beneficiaries to get the advantage of tax-free growth in the Roth. As I understand it, the rules for an inherited Roth do require either withdrawal within 5 years or RMDs but there is no penalty for withdrawal before 59 1/2 or for withdrawal before 5 years after the conversion. If earnings are withdrawn prior to 5 years from the conversion, they are taxed but there is no penalty. That means that beneficiaries who would want the money immediately, would only pay tax on the earnings since the conversion if my mother passed away in the next 5 years.

I'm not seeing any reasons not to do the conversion -- any ways in which my mother or her beneficiaries would be hurt by this.

Am I missing something here?
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Old 03-21-2010, 03:10 PM   #2
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When I read my post it sounds so cold and analytical. I love my mother. I talk to her by phone at least 3 times a day and take a full day each week to drive a distance to visit her, but I still miss what she was terribly. I would do or pay anything to make her remaining life as comfortable and happy as possible. This is not about greed; I don't need or want her money. It is about my fiduciary responsibility to my siblings Years ago my mother charged me with making sure her estate was maximized. I promised to do so with the exception that I would insist her care be the highest priority.
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Old 03-21-2010, 03:25 PM   #3
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Bless you, Furball. It looks like you have the bases covered to me.

I had a similar responsibility before my Mom passed in 2008 and for my wife's aunt who passed in late 2009. I hope your siblings appreciate what you are doing.

Cheers,

charlie
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Old 03-21-2010, 03:35 PM   #4
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We have a good friend in a similar situation, who will be moving to assisted living next month. When last talking with her and her daughter in January she asked if there were any suggestions we have for minimizing the estate taxes to be paid when she died, as she wished to pass on the maximum she could to her son and daughter and 4 grandchildren. Converting IRA's to Roths was one of my suggestions but in fact their CPA had already suggested this along with various other suggestions and she was already in progress to do this.

"Sounding cold hearted" is one of the things that stops such conversations when really it is only being practical if all other personal needs are taken care of. It is natural for parents to want to maximize the inheritance to their children.
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Old 03-21-2010, 03:40 PM   #5
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Originally Posted by FurBall View Post
I'm thinking of doing a Roth conversion of part of my 86-yr old mother's TIRA and I'd really like to get some advice on whether this makes sense. She already has a Roth and this would add to it.
You might want to post this question to the CPA IRA experts at Ed Slott's board. They might have seen this situation before.

Ed Slott and Company IRA Discussion Forum &bull; Index page
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Old 03-21-2010, 03:52 PM   #6
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I am doing the same with my mother in law - half of her children (the sons) are in a low bracket but my wife and her sister are not (married well ha ha).

As you point out the advantages are lower state inheritance tax, lower taxes for some of the beneficiaries (and no harm to others!) and the better off siblings can treat the Roth as their own.

After your mother passes, be sure to tell everyone to take a distribution from the inherited IRA by the end of the first year. If you don't then you are compelled to take it all out within 5 years, whereas taking an RMD preserves your two options.

Does your mother not realize substantail medical deductions? My MIL is moving to a retirement community where they can deduct ~40% of the entrance fee and monthly fees as a medical expense. Planning a massive tIRA conversion in 2010 as she will then be able to utilize her medical deduction of 40% of her entrance fee of $225K.

Agreed you are not being cold hearted just practical and respecting her wishes to pass the money to the kids and not the Taxman.
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Old 03-21-2010, 04:25 PM   #7
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You might want to post this question to the CPA IRA experts at Ed Slott's board. They might have seen this situation before.

Ed Slott and Company IRA Discussion Forum &bull; Index page
Good idea - I had looked there for info but hadn't posted.
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Old 03-21-2010, 04:31 PM   #8
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Does your mother not realize substantail medical deductions? My MIL is moving to a retirement community where they can deduct ~40% of the entrance fee and monthly fees as a medical expense. Planning a massive tIRA conversion in 2010 as she will then be able to utilize her medical deduction of 40% of her entrance fee of $225K.
That sounds like a great plan for your MIL. Unfortunately my mother's entrance fee was not deductible as a medical expense because she entered into an independent living apartment. She is still there because she is propped up by daily family visits, food from my sister, and tons of phone calls from my extra wonderful DH, myself, and my sister.
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Old 03-21-2010, 05:29 PM   #9
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My it really pays to read this forum. I was just starting my 84 year old Mom's taxes and looking at her IRA distributions and realize that I was doing it all wrong.

Rather than taking the RMD, I should be increasing it or doing a Roth conversion.

My mom's IRA is $35K and I think doing a conversion all at once will push her into a new bracket, so I think I'll do 1/2 this year and 1/2 next year.

I am the executor of her estate. The estate is divided among her 3 kids. Is there any benefits from a paper work, estate tax perspective, for her setting up 3 different Roth IRA naming each child as beneficiary vs creating a single Roth and than dividing it among the kids after her death?
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Old 03-21-2010, 05:53 PM   #10
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Originally Posted by FurBall View Post
When I read my post it sounds so cold and analytical. I love my mother. I talk to her by phone at least 3 times a day and take a full day each week to drive a distance to visit her, but I still miss what she was terribly. I would do or pay anything to make her remaining life as comfortable and happy as possible. This is not about greed; I don't need or want her money. It is about my fiduciary responsibility to my siblings Years ago my mother charged me with making sure her estate was maximized. I promised to do so with the exception that I would insist her care be the highest priority.
Hi Furball,

You sound like a sweetheart, your Mother is lucky to have you. I lost my Mom last December and I feel the same way as you. I'd give it all back to have my parents with me in healthy form.

Take care of yourself.
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Old 03-21-2010, 06:18 PM   #11
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As Nords suggested, I posted on Ed Slott's forum and received an interesting response about something I hadn't really considered thoroughly. Although my mother cannot deduct her entrance fee as a medical expense, if she enters the memory unit her monthly fees there will be deductible. So, it makes sense to leave some tax-deferred monies to pay those expenses as they will wind up being close to or completely tax free at that point.
In my mother's case, she has other tax deferred assets and I will probably continue with my plan to convert the TIRA and use her non-qualified annuity or EE bonds for nursing expenses down the road. If the only tax-deferred money is in a TIRA, you may want to look at projected deductible expenses before converting to a Roth.
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Old 03-21-2010, 07:26 PM   #12
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Originally Posted by clifp View Post
I am the executor of her estate. The estate is divided among her 3 kids. Is there any benefits from a paper work, estate tax perspective, for her setting up 3 different Roth IRA naming each child as beneficiary vs creating a single Roth and than dividing it among the kids after her death?
No need for more than one Roth, and you do NOT want to name each of the 3 children as beneficiaries - you name "my children who survive me,. per stirpes". That way if one of the kids predeceases the parent that child's heirs aren't cut out. See the Vanguard web site:

The executor then identifies the recipients after the Roth owner passes on. Here is an excerpt from the form to do so:

Quote:
Use this form
to identify beneficiaries by name when the deceased
owner’s beneficiary designation instructs that the retirement assets be
distributed to unspecified members of a group (for example, “to my
descendants who survive me per stirpes” or “equally to my grandchildren
who survive me”). This form must be completed and certified by the
executor, administrator, or personal representative of a deceased owner’s
estate (“estate representative”).

Print in capital letters and use black ink


In any case, please consult an estate attorney or the Vanguard folks rather than going on what you heard on an internet board!
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Old 03-21-2010, 10:20 PM   #13
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Thanks Chemist.

My mom has a trust set up so I guess I'll just have trust as the beneficiary.
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Old 03-21-2010, 10:39 PM   #14
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My mom has a trust set up so I guess I'll just have trust as the beneficiary.
IIRC, when the beneficiary is not a person then after the owner's death the IRA has to pay out over five years. When the beneficiary is a person (and the IRA is correctly retitled) then the IRA can pay out over the beneficiary's lifetime.

But I haven't read one of Ed Slott's books for years, and that legislation may have been changed.
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Old 03-22-2010, 08:11 AM   #15
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Nords, apparently if the trust has certain characteristics, it might be eligible for stretching purposes........but caution must be used to be sure
those requirements are met.
A trust as an IRA beneficiary - Denver Business Journal:
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Old 03-22-2010, 08:26 AM   #16
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I'd be careful about accepting newspaper articles as definitive statements of tax laws. While it's great to know this is possible, the cost of titling these incorrectly or setting them up wrong is very high. I'd be strongly inclined to get a tax expert's advice and be sure all the little details are done correctly.
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Old 03-22-2010, 08:41 AM   #17
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I'd be careful about accepting newspaper articles as definitive statements of tax laws. While it's great to know this is possible, the cost of titling these incorrectly or setting them up wrong is very high. I'd be strongly inclined to get a tax expert's advice and be sure all the little details are done correctly.
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