Retirement Planning Utilizing a Roth Conversion

Recently, an acquaintance of mine came to me seeking advice for how to assist her mom to execute a Roth Conversion. You see, her mom planned to be able to give the monies in her own IRA to her heirs, without making use of any or all of the funds, herself.

Before I could give her an answer, I had to ask her one or two basic questions.

To start with, I needed to find out how old her mother was. This specific information is critical because the guidelines overseeing traditional IRAs state the owner must take minimum distributions from the fund beginning at age 70 ½ . Her mom was sixty eight, and so she still had some time to execute a Roth conversion.

So now, I wanted to find out if her mom was married and, if that's so, was her mate her lone beneficiary? My friend's father was, in fact, still living, so there were clearly a few things her mother had to consider with respect to doing a Roth conversion.

The woman's first choice could be to convert her standard IRA to a Roth and then leave the money, entirely to her spouse.

In this case the surviving spouse wouldn't be obligated to get minimum distributions, irrespective of how old he became.

Indeed, if the surviving husband desires, he'll be able to leave the monies exactly where they are and just let them continue to grow tax-free.

Having said that, regardless if he opts to take withdrawals, he will be able to do so without having to stress about paying out taxes. The one condition is that the Roth Individual Retirement Account needs to have been open for 5 years or more.

The other choice is to entrust the Roth IRA to her children. In this instance the woman's beneficiaries would be mandated to take an entire pay out within five-years of their mother's death, or start taking bare minimum distributions before December 31st of the year after her death.

To try to make things a bit more evident, I put forth this possible scenario for my friend:

Let's just imagine that her mom possess a traditional IRA worth $100,000. She does a Roth conversion and leaves the Roth to her partner after her death. Yet, because of a healthy pension income of his own, this individual decides to leave the Roth IRA to his daughter (my friend) as soon as he passes away.

So now, because the daughter is only 43 years old, she will have a few options open to her pertaining to getting the money.

She can easily plan to wait 5yrs and cash out the complete amount of money, tax-free, as well as all profits gathered during those five years. Or she can start to immediately take small-scale, annual withdrawals, leaving the the greater part of the funds to continue expanding, tax-free, until eventually she retires.

In any circumstance, I encouraged my friend to help her mom look for professional advice prior to carrying out a Roth conversion, as well as some any other form of estate/retirement preparation.