Roth IRA strategy can save on taxes during estate administration

An individual retirement account (IRA) is a common estate-planning tool used to ensure that one has enough money for retirement years. However, many times, due to other investments or savings, people in Maryland and other states do not need the extra money from their IRAs right away. Therefore, they will avoid taking distributions from their IRAs in order to minimize their income taxes. This strategy could result in leftover money in IRAs to be left for their children during estate administration.

On the other hand, many times one’s children may also be doing well financially. However, after a person reaches the age of 70-1/2, one is forced to begin taking the required minimum distributions (RMDs) from one’s IRA. Therefore, by the time a person’s children inherit the IRA, the RMDs can be liable to income taxes. Many times, income from RMDs from inherited IRAs can cause beneficiaries to be bumped into the next income tax bracket.

One way to avoid this situation is through partially converting traditional IRAs to Roth IRAs. This strategy is aimed at maintaining one’s particular income tax bracket and at the same time minimizing other tax liabilities and charges. Roth IRAs have the advantage of not having any RMDs, which enables the money in the account to grow while allowing people to leave larger retirement accounts to intended heirs. Although beneficiaries will have to take RMDs on their inherited Roth IRAs, these distributions will not be counted as income for tax purposes.

The use of this type of Roth IRA strategy is an example of how planning for estate administration can help one’s children save money on taxes in Maryland or in any other state. Planning ahead can also ensure that one’s intended beneficiaries do indeed receive one’s assets easily rather than having to deal with the probate court process. This is why it is important not to hesitate in creating an estate plan.

Source: Financial Planning, “Estate Planning: Smart Roth Conversion Trick”, Donald Jay Korn, Aug. 19, 2014

Source: Financial Planning, “Estate Planning: Smart Roth Conversion Trick”, Donald Jay Korn, Aug. 19, 2014



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