Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

This is the fourth article in a series dealing with the topic of converting your traditional IRA to a Roth IRA. For other articles, see:

Part 1 – Reasons to Consider the Roth Conversion
Part 2 – The Recharacterization Option
Part 3 – The Impact of Income Tax Rates
Part 5 – The Impact of Investment Returns During the First 21 Months
Part 6 – The Impact of Estate Taxes
Part 7 – Ramifications of Charitable Giving
Part 8 - Putting It All Together

If you convert to a Roth IRA, you are betting that the present value of incremental withdrawals by you and your family in the future are greater than the taxes you will pay at the time of the conversion. Future withdrawals will be maximized when you and your heirs keep the Roth IRA intact for a long time.

The first and most important hurdle for keeping the Roth IRA intact is whether you can pay the tax on the conversion from other assets. If you must use funds from the IRA to pay the tax, my advice is to not make the conversion.

The next hurdle is whether you and your spouse will need to take withdrawals from the Roth IRA. One benefit of Roth IRAs is that you do not have to take required minimum distributions during your lifetime. If you designate your spouse as the beneficiary following your death, your spouse can rollover the Roth IRA to his or her own Roth IRA. Your spouse will not have to take any distributions during his or her lifetime. Thus, if you and your spouse can meet your living expenses from other sources, you will never have to take a distribution during your remaining lifetimes.

The final hurdle is the time period over which your children (and/or grandchildren) will take withdrawals from the Roth IRA after you and your spouse die. They will be required to take distributions over their remaining life expectancy, determined under IRS tables at the death of the survivor of you and your spouse. For example, if the beneficiary is age 45, his or her life expectancy is 38 years.

Your beneficiaries will be eligible to leave the Roth IRA intact for a long time. However, imagine the temptation for the beneficiaries to make tax-free withdrawals to buy new cars or to take vacations. If you are concerned that your beneficiaries might take distributions for wants rather than needs, you can use a trust as the beneficiary of the Roth IRA. The Trustee would be required to withdraw the required minimum distribution and could withdraw more if the beneficiary needs more. In addition to slowing down withdrawals, the Trustee might add investment expertise that the beneficiaries lack.

Families that can meet spending needs from sources other than the Roth IRA have more to gain from converting a traditional IRA to a Roth IRA. If the Roth IRA will be liquidated relatively quickly, paying tax now is less likely to provide a benefit to your family.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A recent decision by the Tennessee Supreme Court (PDF) ruled that the entire increase in value of a 401(k) plan that occurs after marriage is a marital asset that is subject to equal division upon divorce. It does not matter whether the increase in value is attributable to appreciation of the assets that were held in the plan prior to marriage or contributions that were added to the account during the marriage. The pre-marital balance of the plan was separate property that was not subject to division.
 

The case confirmed that IRAs are treated differently. Appreciation of a pre-marital IRA that occurs during the marriage continues to be separate property and is not a marital asset subject to division upon divorce, unless the other spouse substantially contributed to its preservation and appreciation.
 

There are two lessons to be learned from this case. First, keep good records that demonstrate the account balance of the 401(k) plan on the date of your marriage. Second, if your 401(k) plan permits in-service withdrawals, you should establish an IRA, rollover your 401(k) to the IRA prior to your marriage, and exclude your spouse from making any investment decisions for your IRA.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A 2008 law eliminated the requirement for taking a required minimum distribution from your IRA in 2009. The IRS decided to give a reprieve to IRA participants who would like to take advantage of this law by returning a distribution taken earlier this year. You can roll over the distribution to a new IRA until the later of November 30, 2009, or sixty (60) days after the date of the distribution.

Foregoing a distribution in 2009 may not be advantageous. As a general rule, you are merely postponing the tax until a later year. If you believe you will be in a higher tax bracket in later years due to tax law changes, you might pay less tax by taking a distribution in 2009.

Another factor is the ability to convert your IRA to a Roth IRA in 2010. A lot of my clients are planning to make this conversion.

If you anticipate converting your IRA to a Roth IRA in 2010, you should not take a distribution from your IRA in 2009. This will maximize the amount that you can convert to a Roth IRA in 2010.

See the attached guidance from the IRS regarding the ability to roll over a distribution taken earlier this year in order to avoid paying tax for 2009.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link