Estate planning is about more than just transferring assets; it’s about helping clients preserve their wealth, maximize their legacy and minimize future tax burdens for their beneficiaries. One increasingly valuable strategy we can leverage for clients is the Roth individual retirement account conversion.
While Roth IRAs are often viewed through the lens of retirement planning, they also serve as a powerful tool within broader estate and tax strategies, particularly for clients seeking to optimize their after-tax wealth for future generations.
What’s a Roth Conversion?
A Roth conversion involves moving a client’s assets from a traditional IRA or other pre-tax retirement accounts into a Roth IRA. The converted amount is taxed as ordinary income in the year of the conversion. Once inside the Roth, those assets grow tax-free, and qualified withdrawals are also tax-free, which is a significant advantage for clients’ long-term plans.
For many clients, the decision to accelerate taxes now is about gaining control over future tax exposure and ensuring more wealth can be transferred to heirs in the most tax-efficient manner.
Future Tax Exposure
Tax laws are always evolving, and our high-income clients often face the greatest uncertainty. Even with recent legislation, such as the One Big Beautiful Bill Act, which made permanent the tax rates from the 2017 Tax Cuts and Jobs Act, it remains impossible to predict future tax rates. As advisors, we must proactively help clients prepare for this uncertainty.
Traditional IRAs require clients to begin required minimum distributions (RMDs) at age 73, generating taxable income regardless of whether those funds are needed. These distributions, taxed as ordinary income, can unexpectedly push clients into higher tax brackets, especially when combined with other sources of income.
When clients’ heirs inherit a traditional IRA, every withdrawal is taxable. Under current law, most beneficiaries must withdraw all funds within 10 years, often during their own peak earning years, creating significant tax burdens for the next generation.
Roth IRAs, however, don’t require RMDs during the original owner’s lifetime. This flexibility allows clients’ assets to remain invested and compounding tax-free for as long as desired. Converting to a Roth IRA allows us to lock in today’s tax rates, which may be potentially lower than what our clients or their heirs may face in the future. By paying taxes now, we help clients protect a portion of their wealth from future rate increases and add predictability to long-term planning.
When heirs receive an inherited Roth IRA, they’re still subject to the 10-year withdrawal rule, but those withdrawals are tax-free. This proactive approach helps us preserve clients’ wealth, simplify estate administration and provide peace of mind that beneficiaries won’t be burdened by large tax bills.
Strategic Tax Diversification
Diversification isn’t limited to investments, but it’s equally critical in tax strategy. By helping clients maintain a mix of taxable, tax-deferred and tax-free accounts, we provide them the flexibility to draw income, make gifts or implement charitable strategies in a more tax-efficient manner.
In many client scenarios, it may be advantageous to stage Roth conversions over multiple years to smooth out the tax impact. While every situation is unique, Roth conversions often work best when:
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Clients have room to convert without entering a significantly higher tax bracket
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The client or their heirs are likely to face higher tax rates in the future
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Clients can pay the tax due on the conversion from non-retirement assets
Roth IRAs and conversions are more than just a retirement strategy; they serve as powerful tools for building multi-generational wealth. They provide opportunities for legacy planning, tax diversification and protection for clients against future tax risks.
Successful execution depends on each client’s individual situation, precise timing and careful integration with the broader estate plan. As advisors, it’s essential to work closely with clients’ tax professionals. Thoughtful planning today will help ensure a stronger financial future for our clients and their heirs.
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