Inherited IRA

Information Current as of:
1/18/2017

LEARN WHAT IS MOST  IMPORTANT IN CONVERTING TO A ROTH IRA!
(or why you shouldn't)


If This is YOoU, You Are At The Right Place!

Should I convert to a Roth IRA?

Note: Institutions, advisers, accountants, the press, etc. are all telling you what to do.  That is why you feel this way.  You need a source of information you can trust and an adviser who has fully analyzed YOUR situation so you can know EXACTLY what to do regarding Roth IRAs.  Just read the content below so you can calm down and relax knowing you have found the person you were looking for to help you!


Deciding on a Roth Conversion May Come Down To These Two Main Considerations

1.  First, you have to have the money readily available in non-qualified accounts by the time your conversion tax bill becomes due. You can't cash in qualified funds to pay Roth conversion tax bills.  That is a no-no!

2.  Second, you have to have the strong belief that YOUR tax bracket will remain level or go up in the future, even after your retirement.


Trying to convert traditional IRA account money to a Roth which would require you withdraw from the same account to pay the taxes is an instant signal it is not for you!  Don't do it.  It isn't going to do you any favors.

If, however, you feel that your future tax bills will remain level or increase, and you have the cash available to pay Uncle Sam, then the decision to "Roth" should go to the next step. As long as you have the liquid cash to pay the one time tax bill and you have reasonable belief that the tax rates in your situation will not go down and most likely will go up even in your retirement years -- you should give the matter serious consideration now that the law does not restrict high income earners from such conversions. 

Tip:  Generally, low income earners are not good prospects for Roth conversions, but if their income is going up in their profession, converting to Roth early when rates are lower does make sense.

Having stated the two main considerations, you will still need to get a good handle on why, generally, converting to a Roth IRA may be a correct assumption for ALL Americans who retire with adequate and semi-high or high income (or having adequate income producing assets).  I say this because of the U.S. National Debt Clock.  When you review the numbers on this site, it may be a "guarantee" that taxes are not only going to go up...but possibly shoot through the roof for many of us! 

Note: Be sure to hit the "back" button afterwards to finish reading here!


Reminder

U.S. National Debt Clock


Why Some Should Convert Their IRA to a Roth IRA

The reason is simple.  If you feel the tax rates will go up and YOU will be affected by the increases with income (working or retirement), a proper review may be in order. With some number crunching, you can reasonably model the future tax environment with different scenarios of rate of return, rate of inflation, and the assumed tax rates.

Since the cap has been removed and all taxpayers can now convert, regardless of having a high AGI (Adjusted Gross Income) over $100,000, a free study is encouraged if you are curious. Especially since the attitude is growing that tax rates will be going up soon.

And just as bad, certain deductions we have counted on for years are trending lower, or disappear completely! Don't tell your kids or grandkids to buy a house for the "tax deduction" like you may have done once. There is no guarantee it will continue on as a credible write off.

And, with lowered home values (still lower than 2005 values) and record low mortgage rates -- much of the current interest paid on mortgages isn't really helpful on a tax return with the standard deduction often being higher than trying to itemize deductions.

Many savvy tax advisers have been telling their clients to systematically convert separate accounts (or creating separate accounts for annual conversions), if they previously earned less than the $100,000 AGI limit (married couple) cap that was lifted January 1st, 2010.

The country needs more money with massive U.S. debt payments and National health care costs that could drastically increase outflow by the government to keep the program in force. For high income earners now eligible, I can only imagine that tax rate bracket "creep" may happen each year you wait to report and pay your taxes on your Roth IRA conversion amounts. 

So common sense and full or partial conversions may be smart... knowing you always have until the tax extension filing deadline the following year, to change your mind and cancel the taxable event instantly! Just be sure you have the cash handy to pay the tax bill.

As previously noted, the only way to know which is best for you and your tax situation is to project the future in special software that can determine your best option.  For a small fee, you can engage that service with our firm so you can make sound decisions and act only after you have reviewed the true costs to convert or not convert. 

For 2016 conversions, we can give you all your options and let you see what the future may look like by converting taxable money into tax free money. To make a sound decision, using a professional IRA adviser makes a lot of sense.


What About Re-characterization Options?   

There is always an option to reverse your Roth IRA conversion if done in time. With the stock market up and down, it is safe to say your stock market gains this year (2016) are still up, if barely. (edited May 13, 2016), and being an election year, a wild election year, anything can happen. 

The decision to keep a Roth conversion or revert it can not be taken lightly. As of this edit, it is too late to re-characterize any Roth conversion done in 2014 or before.    

For most, 2015 conversions buys time to re-think your conversion and determine when or if you pay the income taxes on the gains reported. (100% is taxable  since most IRA's have a "zero" tax basis) You may need to amend your tax return if you have already filed and paid the tax bill due on a Roth conversion.

But, don't wait until the last day allowed in 2016 (October 15th) to change your mind. Your Trustee holding your Roth IRA account must have the complete re-characterization DONE by the IRS deadline and needs a good 15 days to be sure the reversal can be done!

Another important point is to not forget that changing your account back to traditional status resets your RMD (required minimum distribution) calculation based on any remaining traditional IRA account values as of December 31st of the year you converted + the value of your conversion amount that was reported as taxable income! In other words, it is as if you never took the funds from "Traditional" to "Roth" regarding RMD planning. So it could bump up the minimum RMD you must take out.

Hopefully, ANY Roth conversion is done for sound financial and tax planning purposes. And so is the decision to later reverse your action if need be. But, don't reverse solely on the short term market ups and downs. If it was based only on market direction, most likely your conversion was for the wrong reasons.

You can hire our consulting firm to help you discover the right reasons to convert to a Roth IRA...

Hint:  Long term income that GOES TO YOU!  And to your kids or grand kids!!!


When (or Why) Some Should Never Convert to a Roth IRA

This situation is the easiest to understand and yet the hardest to police. If you have a Roth IRA account, you will still find value in this discussion.  The best laid plans can go astray and nothing is more true then when it comes to trying to set up "tax-free" income for yourself and eventually, for your heirs. Only the Roth IRA can do that. 

Just like our sister site "Inherited IRA Hell", that tries to inform people BEFORE they make mistakes they can't reverse, we again warn you why a Roth conversion could put you into a "Roth IRA Hell" if you convert and find it is not for you. However, the IRS will let you reverse your decision as long as you do so by the deadline the year after conversion.

You currently have until the deadline for personal tax returns filed on extension up until October 15th following the year of conversion. 

Please note that converting traditional IRA funds to an IRA is not going to be a wise decision if any of the following scenarios exist:

You are elderly and single (or the surviving spouse) and you are not in good health.  (Your lifespan is reduced)

Your Roth IRA beneficiaries (heirs) are going to need "capital" above and beyond the limits of income the internal Roth capital funds can generate.  (This means they aren't financially well off)  Conversions make no sense if "principal" is going to have to be reduced in the near future. You may not find that fact elsewhere as you study and search for proper information. But it is a fact!

You love paying taxes...and the more the better!!!  (Say, I have some ocean side property I would like to sell you here in Arizona!) 

The Main Point to Think About:   Converting larger amounts of a traditional IRA to a Roth IRA is like buying a car.  If you just need to get from point A to point B, any car will do in the short term. 

But, if your point A is early retirement at age 55 for example, and you are from a family with a history of long life and in great health, then you not only NEED a higher cost vehicle here -- you MUST have it to stretch your money for many years. 

By making good investment decisions regarding Roth accounts you can avoide the largest drain on your checkbook during your retirement years --
TAXES!!!  (in other words, nothing changes)

No one wants to run out of money before they die.  It is the greatest fear facing Americans who retired early (and perhaps too soon) with inadequate assets at the time.  But circumstances such as the 2008 stock market crash reduced their nest eggs substantially.

Regardless if a drop in retirement assets comes from bad investments, bad timing, bad luck or bad advisors -- the point you start cashing in principal to pay your monthly expenses is the point where you set the stakes to run out of money.

If any of these points covers your situation, the Roth conversion is probably not for you, even if you are qualified otherwise!

But, be sure your investments are "safe" and that they have the ability to pay rates of return higher than the lowly bank CD.  Contact us to point you in the right direction in that regard, if you need some investment help on where to invest your IRA or Roth IRA qualified funds in guaranteed insurance annuities, (that don't allow sudden principal losses so common with variable stock market type investments)

Or if you want to try self directed accounts that put YOU in charge, to buy quality investment grade real estate.


So, then, Who Should Convert to a Roth IRA?

Tax Cost to Convert to Roth IRA

Shooting Yourself In The Foot

O.K., it is best you understand that most accountants and CPA's are trained to tell you that tax deferral is always best. I know, because I have told clients that myself for decades!

But, in a new world order pushing for sharing the wealth, just where do you think the government is going to get all that money to spread around?

Yes, creating a Roth account from current traditional IRA money accounts can be the same as shooting one (1) foot. But, you get to keep the other and you have two arms completely unharmed as well.

Now, the main reason to convert your current Traditional IRA?

US Tax law forces income from any qualified retirement plan by the time you reach 70 1/2 in age. If you are required to take income from your traditional retirement plan(s) and all it does is force your taxes up (social security gets hit hard) and give you money you have to either spend, gift, or find a new home for - then you are an excellent candidate for a Roth conversion strategy.

Especially if this "forced" income isn't really needed, moving some or all of the account balance into "Roth" status can be a very good strategy, as long as you you trust the government not to later change their mind. 

What I am saying is that if push comes to shoving, would the US government be capable of reneging on your Roth tax free income status?  Maybe not for you in your lifetime, but for your kids or grandkids? I can't really answer those questions...

Yes, tax planning with Roth conversions (you can do it over a period of years) changes the "income" from taxable to TAX FREE, so it is an honorable step to take because of the ultimate benefits promised.  If married, and when you die -- your spouse does a rollover (spousal rollover) and resets the stretch period for his or her lifetime to take out the tax free income.

TAX FREE INCOME from whatever you invest in (you could push the limits a little with your risk levels knowing higher gains are all free), lasts for the remaining life expectancy of the surviving spouse. But, the stretch takes place after that. Leave it to your kids and guess what, they get to stretch the TAX FREE income for the rest of their life expectancy too!

The short answer: The tax free benefits are generational and in time, hard to beat for a one time tax payment that sooner or later, has to be made anyway even if you stretch the IRA when you die (create an inherited IRA for beneficiaries), Roth IRA conversions have merit and should be considered.

 Someone some day has to pay the tax!!!

With tax rates going up to combat that National Debt Clock -- remind yourself and your accountant that tax rates are the lowest in the last 40-50 years right now. (Not for long...)  It is a good reason to order a study on your situation. Let us do that for you.

Note:  New estate tax law in 2012 took away the need for A/B or A/B/C trust planning for most, but does not remove prior legal documents still in force using them in an estate plan.  Be sure to review your estate plan to be sure it now contains the proper terms to cover you situation under the new permanent estate tax law we now have.  Arizona residents, visit Arizona Living Trust Information for update options.


And, by the way, and in case you were wondering...spousal rollovers are not Inherited IRA's and they can be converted to Roth, subject to normal IRS rules.  

And though some may find an exception (rare), Inherited IRA accounts ARE NOT eligible for Roth Inherited status.

(it's a question we get asked a lot)


M.D. Anderson

I hope you found my free information helpful. And, "Thanks" for Your Visit! Send your friends here, they most likely are seeking competent Roth IRA information also.

Give me a call* or E-mail if you have any questions or would like to pursue a tax review, or investment options for your IRA or Roth IRA funds.  And, have a great year!

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Disclaimer: The information contained on this inherited IRA information site, though deemed reliable and accurate, is solely the opinion and statements of the adviser profiled. Therefore, it should be considered "general" in nature and no action should be taken based on this information until such time your specific situation and circumstances can be reviewed and analyzed by competent and qualified tax, insurance, legal, and/or other financial advisers. This information is not intended, nor should be construed as legal advice. FSI can not and will not give you legal advice. If you need legal advice, we can refer you if you desire and request it. Founded in 1990, FSI is a long-term Financial Advisory and Arizona domiciled Corporation now providing services nationwide and in some foreign countries. Services profiled herein are available unrestricted to Arizona residents. Residents outside of Arizona are eligible for certain consulting services and to legal (lawyer) referrals by our firm when requested of us. For Arizona residents, communication with an Arizona Certified Legal Document Preparer (AZCLDP) are private and confidential but are not "privileged", such as they would be with an actual Lawyer.

Besides being a licensed  Arizona Certified Legal Document Preparer, Mr. Anderson serves as an associate of an international law firm. He also is an Arizona Professional Accountant/Consultant and licensed IRS registered tax preparer and ERO (Electronic Return Originator) agent/firm. He also is an Arizona licensed Professional (Realtor®)/consultant) with Realty One Group and a licensed Professional insurance agent and corporation for life, health or annuity sales. Lastly, he and his firm is an appointed representative for Royal Metals Group as a Professional Precious Metals consultant and sales adviser.  Inherited IRA accounts have many options you may not be aware of, including alternative "hard asset" type investments. Let M.D. show you the the options your current banker, broker or insurance agent may still be hiding from you!

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