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 If earnings are withdrawn prior to 5 years from the conversion, they are taxed but there is no penalty.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?
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?
