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Switching to Roth
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March 14, 2000: 10:39 a.m. ET
Your heirs could benefit if you convert your IRA late in life
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NEW YORK (CNNfn) - Converting your IRA to a Roth may make good tax sense at any age, assuming your adjusted gross income is less than $100,000. But when you're near the end of your life, it can be a great gift to your heirs.
Steve Trytten, an estate-planning attorney with Calleton & Trytten in California, recently worked with a retired, terminally ill widow whose net worth totaled $1.5 million. She wanted to leave her $200,000 IRA to her adult twin children.
Trytten advised her to convert the IRA into a Roth, since her yearly investment income fell well below the $100,000 cap.
To pay for the $70,000 in federal and state income taxes due on her conversion, Trytten's client used some cash as well as money from the sale of bonds. Her capital gains on the sale were not high because she had a high cost basis.
The benefits of such a late-life conversion were two-fold for the twins: First, it saved them in estate taxes. Their mother's $1.5 million estate put her in the 43 percent to 45 percent estate tax bracket. Reducing her estate by $70,000 meant they owed $30,000 less in tax (43 percent X $70,000).
What's more, Trytten said, the Roth conversion increased the overall value of the twins' inheritance by about $200,000, given what they saved on estate taxes and the fact that the money in her Roth will continue to grow and be distributed tax-free over the balance of their lives.
According to life expectancy tables, the twins, who are in their mid-40s, are allowed 35 years after their mother's death during which they must take minimum required distributions from the account. Starting in calendar 2001, they must withdraw 1/35 of the money, or about 3 percent. In the next year, they must take 1/34, the next year 1/33 and so on until their 35th year, when they must take out 100 percent of the money.
Given that their early distributions are so minimal percentage-wise, the Roth account is likely to grow substantially during the first 20 years or so of the extended deferral period, and only after that will the total account begin to shrink, Trytten said. 
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