To: ANANT who wrote (283 ) 2/7/1999 8:37:00 PM From: Sonki Read Replies (1) | Respond to of 395
WHEN CONGRESS APPROVED the Roth IRA in 1997, it probably didn't anticipate that this retirement savings vehicle would turn out to be such a terrific estate planning tool. But it is. Seniors converting an IRA to a Roth can increase the size of their estate, reduce their estate taxes and eliminate the income tax the heirs would otherwise have to pay on a traditional IRA. Sound too good to be true? Here's how it works. this is pointer to the article which has many other pointersadforce.imgis.com |2.0|34|21748|1|1|misc=01133727488; No Minimum Withdrawals The first benefit comes from the fact that Roth accounts are not subject to the minimum withdrawal rules that apply to regular IRAs. These rules force you to begin draining your regular IRA the year after you turn 70 1/2. Of course Uncle Sam is there for his handout, and your friendly state tax collector is next in line. This is galling when you don't need the money. Converting your regular IRA into a Roth puts a halt to this nonsense. After the conversion (which is only available to singles or joint filers with AGI below $100,000), you can live out the rest of your days without being forced to accept withdrawal checks against your will. You are free to leave the account balance untouched and accumulate as many tax-free dollars as you can for your estate. (If you convert after age 70 1/2, you still have to take one final minimum distribution for the conversion year; whatever is left in the IRA can then be converted to Roth status.) Paying the Tax Of course, you will have to pay tax on any accumulated earnings and tax-deductible contributions when you make the Roth conversion. But this isn't a bad thing, as long as you can pay the tax out of non-IRA assets. Why? When you pay the conversion tax, you effectively prepay income taxes for your heirs without owing any gift tax or using up any of your valuable $650,000 estate tax exemption. Plus, you will reduce the size of your taxable estate, which is a good thing. Finally, you can spread the income tax hit out over four years if you converted in 1998 (No such luck for conversions in 1999 and later years). After You Die Your heirs mayl owe estate tax, but no income tax on withdrawals from your Roth account. And now the account falls under the same minimum withdrawal rules as regular IRAs. However, if your heirs don't need the IRA assets right away, they can string out those withdrawals over many years while continuing to let tax-free earnings accumulate in the Roth. (See Inheriting an IRA.) Example: Husband is 65 this year. He converts his regular IRA into a Roth account and lives for eight years, gloating all the while about the tax-free status of the account and never taking out a dime. The Roth IRA then goes to the wife, the named beneficiary, who is age 70 at the time. According IRS life expectancy tables, the wife should live another 16 years. Since she can treat the inherited Roth account as her own, she need not take any minimum withdrawals. Being thrifty, she doesn't take out a dime. As scheduled, she passes the Roth baton at age 86 to her daughter, who was designated as the beneficiary when the wife took over the account. Daughter is age 55. The IRS says her life expectancy is 29 years. Now, the endgame has been reached. She must start taking minimum withdrawals over 29 years. But she takes only the minimum, thus preserving the account's tax-free earning power as long as possible. In this case, the account "lives" eight years with the husband, 16 years with the wife, and 29 years with the daughter. That's 53 years in all; not bad considering the husband was 65 when he did his conversion deal. What really happened here is husband and wife used the Roth IRA to set up a long-term tax-free annuity for the daughter. But it didn't cost as much. Of course, for all this to work out as illustrated, the husband should designate the wife to be the beneficiary of the Roth IRA upon his death. At that point, the wife should declare the account her own by retitling the account in her name and designating the daughter as the beneficiary upon the wife's death. Finally, daughter must begin taking minimum distributions by December 31 of the year following her mother's death. Otherwise, the daughter will have to liquidate the account after five years, which would bring a premature end to all the fun associated with tax-free income. Risks For this strategy to make sense, two things must happen. First, the Roth IRA rules must remain intact. Second, you must believe you won't need the money in the Roth IRA during your lifetime and that your heirs will pretty much leave the account alone, except when required to take minimum distributions. To the extent these prove untrue, the idea of using a Roth IRA to create a tax-free annuity for your heirs becomes that much less attractive. Remember, you are paying a high price -- the upfront conversion tax -- for the privilege of tax-free withdrawals over many years. If you do go for it, you probably won't be alone. In fact, the recent IRS Restructuring and Reform Act includes a provision intended to encourage more well-off seniors to convert regular IRAs into Roth accounts. Starting in 2005, you won't have to include regular IRA minimum withdrawals in your AGI for purposes of meeting the $100,000 limit for conversion eligibility. Congress anticipates a big jolt of conversion tax revenue in 2005, and has already accrued that amount on the federal government's income statement to offset the cost of revamping the IRS. For more information on Roth IRAs, see our other IRA Corner stories Roth IRAs: To Convert or Not, Which IRA Is Best? and Roth IRAs: You Wanted to Know.