Unfortunately, one of my clients is entering the last stages of her life. Her deductible medical expenses this year have been substantial due to home healthcare and hospice care. I checked with her CPA and confirmed that a portion of her IRA can be converted to a Roth IRA for a modest income tax cost. I talked to her brother, who has her power of attorney, and recommended that he convert a portion of the IRA to a Roth IRA.
The conversion will eliminate future income taxes for my client’s children on future distributions from the Roth IRA. The future savings for the children, one of whom lives in a state with a state income tax, will far exceed the incremental 2015 income taxes that my client will pay.
An ancillary benefit is that my client has a taxable estate for federal estate tax purposes. The incremental income taxes will be deductible for federal estate tax purposes (or will reduce her taxable estate if she unexpectedly lives beyond April 15). This effectively reduces the incremental income taxes by 40%. Assume for example, that $100,000 is converted at a tax cost of $15,000. The net cost after factoring in the estate tax deduction of 40% will only be $9,000. The future tax rate for my client’s children will far exceed 9%. Thus the overall taxes will be reduced.
In summary, a late-in-life Roth IRA conversion may save substantial income taxes for your children. Make sure that you have a durable general power of attorney which authorizes your agent to make a Roth IRA conversion.