Convert Grandma's Regular IRA to Roth now ?

[Delawaredave5]

I understand the tax and RMD differences between tIRA and Roth.

My understanding is the distribution options to the person inheriting an IRA are the same whether traditional or Roth (ability to stretch over their lifetime, etc).

Question: should Grandma convert her tIRA to Roth now before passing to kids ?

If Grandma converts $30k chunks each year - the tax would be 10%. If kids earn $100k, they would pay 25-28% on the distributions.

So it is advantageous to convert all of it to Roth ?

Given a $100k tIRA at 7% investment return:
No Conversion: $100k would grow to $200k in 10 years, then net $150k after 25% taxes paid by heirs

Conversion: Roth IRA would be $90k, would grow to $180k after 10 years - then no tax.

So the heirs are ahead $30k after 10 years ? Right ?

 

[marinauser]

How old is grandma? Could it turn out that she needs the money for herself in the next couple of years? If so, is that a problem if the Roth has only been in place for two years. If I remember correctly there is a 5 year time period before all withdrawals of converted funds are tax free.

 

[GrayHare]

If you want to minimize tax then whoever's tax rate is lower should pay the tax.

The only other purely-$ consideration: if Grandma pays the tax it reduces the size of her taxable estate.

 

[pb4uski]

$30k = $200k * (25%-10%). Sounds right to me.

 

[Animorph]

Looks right to me. I don't think the 5 year rule will apply if grandma is over 59.5.

 

[kaneohe]

see here Fairmark Forum :: Retirement Savings and Benefits :: Distributions from RIRA after TIRA transfer

If grandma is > 59.5 yrs old and if oldest Roth is not 5 yrs old, then withdrawing the conversion is tax/penalty free but withdrawing the earnings
is subject to tax.

 

[prof12]

I have a question about this: It was my understanding that to have a Roth, whether it is a conversion from a traditional to merely adding to it, the person had to be working. Is this correct or not? I tried to put money into an existing Roth and was told I couldn't because I was retired. prof12

 

[user5027]

Not correct. You do not need to be working to convert tIRA to Roth.

 

[REWahoo]

You cannot contribute to a Roth IRA without earned income, but you can convert from a traditional IRA to a Roth IRA.

 

[MichaelB]

Given a $100k tIRA at 7% investment return:
No Conversion: $100k would grow to $200k in 10 years, then net $150k after 25% taxes paid by heirs

Conversion: Roth IRA would be $90k, would grow to $180k after 10 years - then no tax.

So the heirs are ahead $30k after 10 years ? Right ?

This looks to be in the best interests of the heirs, but is it in Grandma's best interest as well? That is, will Grandma never withdraw this money for her needs? If, after the conversion, she were to incur substantial medical costs and need the funds she might end up with unused medical deductions.

 

[pb4uski]

I have a question about this: It was my understanding that to have a Roth, whether it is a conversion from a traditional to merely adding to it, the person had to be working. Is this correct or not? I tried to put money into an existing Roth and was told I couldn't because I was retired. prof12

You do NOT have to be working to convert from a traditional IRA to a Roth IRA. You can do that anytime, however the amount converted will be taxable income so you will need to pay the tax.

If you tried to make a contribution to an existing Roth and were told you couldn't because you were retired, that was close to correct - as REWahoo posted, you need to have earned income to contribute to a Roth. There are situations where you are retired and might still have earned income (say you retired but worked earlier in the year, or worked part-time or have a self-employment income reported on Schedule C, etc).