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September 09, 2008 at 08:00 PM
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As life expectancy increases and baby boomers retire in record numbers, more middle-class Americans are creating or revising wills and living trusts to leave as much as possible to their loved ones. As an advisor, you can provide one more compelling reason for new and existing clients to rely on you and your financial guidance, by demonstrating the potential benefits of converting traditional Individual Retirement Accounts (IRAs) into Roth IRAs when discussing estate planning strategies.
Many IRA owners and retirement plan participants seeking your advice already know about the benefits of the Roth IRA when saving for retirement. But they might not realize the Roth IRA is equally effective as an estate planning tool.
Individuals who convert a traditional IRA into a Roth IRA can reduce their estate taxes. They can also eliminate the income tax their heirs would otherwise have to pay on withdrawals taken from an inherited traditional IRA.
Planning Ahead to 2010
Until recently, the Roth IRA, an excellent tax-advantaged investing tool, had been unavailable to higher- income taxpayers. Now you can remind these individuals to take advantage of special provisions in the current tax law that will take effect in 2010. These provisions eliminate the existing $100,000 maximum income criteria and allow anyone regardless of income to convert a traditional IRA to a Roth IRA. This is particularly important because the current federal estate tax laws are scheduled to sunset in 2010.
With your estate planning guidance, individuals can take advantage of the 2010 conversion rule. In that year only, an individual has the option of paying the income tax resulting from the conversion divided equally between 2011 and 2012 as opposed to paying all of the tax at once.
It is even conceivable that your clients could want to make nondeductible contributions to their traditional IRAs in 2008 and 2009 and get a jump start on the new law. The entire amount built up prior to 2010 will be available for conversion in that year.
Easing into Conversion
When creating their estate plans, many people will wonder what implications this tax law change will have. If your clients continue with their traditional IRA, they will need to begin taxable minimum distributions from their account by April 1st of the year following the year they turn 70 1/2 years old, whether they need the money or not. This reduces the positive effect of tax deferred compounding interest.
In the past, your clients who were over 70 1/2 , and receiving minimum distributions from their traditional IRAs, may have had their incomes pushed above $100,000 and would not qualify for the traditional conversion. The 2010 law will change this.
