A client recently said, “I want to convert my regular IRA to a ROTH IRA so when my kids inherit, they don’t have to pay income tax on the distributions. I realize I will be taxed on the value that is converted. I prefer to pay that income tax so my kids will not have to pay ...”
We talked about converting the entire amount or converting part of it now and part of it in the next year. That way it may be a little less tax since it will not be so much as to have some of the value taxed at a higher tax rate than he is used to paying.
Since the father is married and files a joint income tax return, if the taxable income (after the standard deduction or Schedule A itemized deductions and the exemptions) is less than $74,900 then the extra income might only be taxed at 15 percent.
If the taxable income is more than $74,900 but less than $151,200 in 2015, then the 25 percent tax rate would apply.
By paying the income tax during his lifetime, he is sort of making a gift to the kids. He is going to pay the income tax now instead of them paying it in the future when they receive distributions. That is not deemed to be a gift for form 709 U.S. Gift Tax Return. He can still make Annual Exclusion gifts to each kid, each year of up to $14,000 plus pay education or medical bills directly to the school or medical provider. No form 709 will be required to be filed.
If and when the kid inherits the ROTH IRA, there is a choice of an immediate full distribution or taking distributions over the kid’s life expectancy (many years) as required minimum distributions.
The father does not have to take any distributions from the ROTH IRA but if he does, it will not be taxable.
He understands the lifetime death tax exclusion for 2015 is $5,430,000 and feels he will certainly have less total assets than that at his death.
He also hopes not to use the ROTH IRA himself, but knows if he needs it and all other assets have been exhausted, it is still available for his needs.
The sooner money is put into a retirement account (and invested decently) the better. It takes years for the interest to compound and the account balance grow.
It is also good to help a young person get a savings habit. Even small amounts saved early in life will be a benefit in the future.
Did you hear? “More people should learn to tell their dollars where to go instead of asking them where they went.” — Roger W. Babson.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.
