<A big additional benefit concerns estate planning, traditional IRA's are decimated by taxes at death, while Roth IRA's are to be taxed like other assets.>
I happen to practice law in this area and tell most of my clients it would be foolish to pay income taxes now on the entire IRA to get the "advantage" of tax-free distributions at a later date. The early conversion only works for those few people who expect to be in a higher income tax bracket in later years. And it is a disaster if the Roth IRA does not accrue substantial appreciation after the conversion or if Congress decides in a later year to freeze the benefit of the Roth IRA. Remember that with or without conversion, the 15% penalty on excess withdrawals (over $150,000/ year) has been repealed.
For estate taxes, the Roth IRA will still be subject to estate taxes (50-55% for many) on death if a non-spouse is named as beneficiary. If a spouse is named, there is a marital deduction, whether it is a Roth IRA or a regular IRA, but it will then be in the survivor's estate. The 401(a)(9) minimum distribution rules which apply on death to regular IRA's are not bad, if you know how to plan for them and do this before the required beginning date (April 1 following the year in which age 70&1/2 is reached).
About the only time Roth IRA conversion makes sense is if the client is very wealthy, and neither he nor his spouse has need of the IRA during his lifetime. Paying the income tax now gets 33%-44% (depending on state and federal brackets) of the IRA out of the estate, esentially a tax free gift to the survivors. It's bit complicated to explain, but we strongly urge you to consult an expert before you subject yourself to unnecessary income taxes. Conversion to Roth IRA's is a Congressional trick meant to raise revenue. It is not a smart move for most.
Regards,
LordDarley |
