Filed Under:Life Insurance, Life Planning Strategies

6 clients who could benefit from a Roth conversion

The hottest estate planning move last year may well have been the Roth IRA conversion. Fidelity Investments came out with a study last week reporting that December 2012 saw a rise in Roth conversions of 52 percent from the year earlier. For 2012 as a whole, Roth conversions were up 12 percent from 2011.

There was a reason for that: Tax changes that took effect at the beginning of this year made the conversion imperative for a lot of people. With marginal tax rates going up for the highest tax bracket, it made sense for those people to move their money from a regular IRA — which is funded with tax-free dollars but is taxable upon withdrawal — to a Roth, where that money goes in after you’ve paid taxes on it, but is tax-free upon withdrawal. So it made sense that people wanted to push more taxable income into 2012, which had lower marginal rates than 2013.

  • People who aren’t interested in managing a legacy or strong charitable contributions in their retirement years. Since a regular IRA is taxable when the money is withdrawn, it has the possibility of reducing the amount of money available in retirement. Someone who wants to be around to give grandchildren tuition gifts might want to keep that retirement income higher.
  • See also: What if grandma’s uninsurable?

    • People with temporarily low income. The money converted from a regular IRA to a Roth counts as regular income in the year the conversion is done. So if there’s a lull in your clients’ income — the business has had a down year or your client took a yearlong sabbatical — that might be a good time to make the conversion and pay income tax at the lower rate.
    • Clients who are recently widowed. Tax rates for married couples filing jointly are more favorable than those for single filer. If a client has lost his or her spouse this year, it might make sense to convert to a Roth, take the tax hit at the more favorable rate, then receive the tax-free withdrawals in subsequent years when their rates might be higher.
    • Clients who expect to gain terrific returns on their investments. Remember, clients are not only exempt from taxes on the withdrawal from the Roth, they are also exempt from taxes on gains from investments within the account.

    On the other hand, if your client converted to a Roth at the end of 2012 and is now thinking it was a bad idea, there is still an alternative. The IRS has decreed that any IRA conversions that took place during 2012 can be unwound before Oct. 15, 2013. That little bit of leeway might be enough to entice your clients to just take a look at this estate-planning option.

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    Nichole Morford

    Nichole Morford
    Managing Editor

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