My aunt unfortunately is terminally ill and has been taking RMD from a TRADITIONAL IRA for a while. She's in a low tax bracket and would like to maximize the benefit for her daughter (sole beneficiary) upon her death. Is it worth it for her to convert to a ROTH before her death (and before her daughter inherits the IRA)? Daughter is in her early
50's and the account is worth about $100K.
Converting to a Roth can save taxes in the end. It depends on the Tax Bracket of your Aunt and her daughter. The Daughter will have her own RMDs based on her age, so the RMD will not be a large fraction of the money. About 3% I believe. So her tax may be less than the rate that a
100K conversion would cause. Your Aunt and her Daughter should get together and compare notes. Convert only up to the bracket the daughter is in. I hope that's clear.JOE
Do you mean, "convert up to but not including", or "convert up through", the bracket the daughter is in?
The latter, I believe. I only nitpick because the size of the bracket can be rather significant compared to a $100K conversion.
-Mark Bole
I'd actually be more interested in the daughter's situation. We keep talking about now knowing the tax rates 5 or 10 years hence, and I agree with that. But we can know if the daughter is a saver or not. If she will have income at retirement that will put her in the 15% bracket, then her mom should convert only what will be taxed at 15%, to pay 25% now wouldn't maker sense. In 2007, it would take a gross income of $40,600 (this includes std deduction and exemption) to remain in the 15% bracket. If one has no pension, and we're just looking at money coming out of 401(k) or pre-tax IRA money, that's $1 million. Converting it all this year will have most of it taxed at 25% or 28%.
As I mentioned, keep in mind, the RMD for the daughter will be less than the expected growth in the account. At 50, the divisor is 34.2, so at 62 it would be 22.2 (recalculation is straight math, no going back to table). So a complete analysis would have to include the potential higher tax while she's working vs lower at retirement.
JOE
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