My mother who is in her 80's has about about a million in a traditional IRA. She owns a house outright, Her only her assets or income are Social Security and small pension she receives monthly.
Is there a good reason for her to do Roth conversions at this point?
Are there any drawbacks to doing Roth?
Thanks
Is there a need for Roth Conversions at 80yrs old ?
byu/bwsct inpersonalfinance
Posted by bwsct
8 Comments
CPA/Author Mike Piper had done a good [Roth Conversion Deep Dive](https://www.youtube.com/watch?v=Wjbf9KVSG7s) presentation for folks considering taxable Roth conversions, maybe some of this is applicable to you.
>Is there a good reason for her to do Roth conversions at this point?
She may have additional space in a low tax bracket that would make sense to take advantage of. She might have a period of increased costs or be paying a lower tax rate than her inheritors might.
At that age it may just depend on the tax bracket of her heirs. If your tax bracket is much higher, then yes, do it even if she needs to pay extra in taxes
Talk to a CFP who also does tax strategy. Might need to interview a few.
Think of it as pre paying her taxes now, while in her current tax bracket in order to reduce the possibility of higher tax brackets (over simplifying of course). My gut reaction is that this does not make sense for someone her age.
However, if she has lots and lots more money than she needs, and can easily afford to spend extra now, she Might be able to reduce the taxes her heirs have to pay. BUT, this should only be done if she really has tons of extra money. And remember that even if she’s under spending now, her medical needs/costs are likely to skyrocket any year now.
Be careful about encouraging her to do something that only benefits you as a possible heir, and only costs her now.
For inheritance and keeping tax as low as possible.
The best time to do conversions is before drawing pensions or social security. But if she has RMDs that are (in the future) going to put her in a higher tax bracket, it might make sense to do some now.
Drawbacks to doing Roth – there’s a crossover point where – will she live long enough to make use of those tax savings? Will this cut into her ultimate wealth and impact ability to cover assisted living or memory care? You can get tax savings paying for much of that care from your IRA but of course, Roth wouldn’t help you there. In my area, her one million right now would not quite buy her six years of care. Also, because a Roth conversion counts as additional income, it will affect her IRMA penalties.
Mom pays a very low income tax rate now with her low income, a Roth conversion makes future earnings and any future inheritance tax free. The inheritance issue is sticky because it’s unethical and highly selfish to handle her financial affairs based on another recipient’s tax advantages if that recipient will be you. But it would save the recipient a BUNCH of money from potentially the 22-24%+ tax bracket if mom were to covert it under her low (10%?) bracket, esp if it grows between now and then. If she were to pass along $1M that had to be fully converted within 10 years and fully taxed as ordinary income under the beneficiaries name(s), the account would lose a lot of that value in taxes.
But, the risk is her income exceeding the IRMA threshold and spiking her Medicare premiums. But, if she’s already above that I’d look to convert up to the max in (at least) her current tax bracket. When she needs the money she’s gonna pay the tax anyway (pay now or pay later, the math is the same in the end as long as she stays in the same tax bracket). I’d at least convert up to the IRMA threshold (with a safety margin).
If mom is capable of having the discussion I’d consider discussing with her. Ask her to discuss with her financial advisor, or maybe get her an appointment with one if she doesn’t have one so she can get some objective advice from a non-beneficiary.