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Should Retired Persons Consider Converting Their IRAs to Roth IRAs?

March 27, 2010

Beginning in 2010, the federal tax law allows all persons who have IRAs to convert them, in whole or in part, to Roth IRAs. A special 2010 rule allows taxpayers to divide the taxable income cause by the conversion between the 2011 and 2012 tax returns.

One reason for a retired person to consider converting an IRA to a Roth IRA is that the retired person may be in a lower income tax bracket than the eventual beneficiaries. For this reason, deferring income tax by keeping the IRA could cause overall higher taxes. Retired persons may want to consider converting just enough of their IRAs to use up their lower income tax brackets.

Another reason for a retired person to consider converting an IRA to a Roth IRA involves MassHealth or Medicaid planning for a married couple. If one spouse enters a nursing home, that spouse is allowed to keep only $2,000, and often the last-minute plan is to get all the other assets over into the name of the spouse who is still at home. To get the institutionalized spouse’s assets down to the $2,000 level can often mean closing out the IRA and incurring all of the income tax on the IRA in that calendar year. Rather than running the risk of having to transfer the IRA in one calendar year and cause the maximum amount of income taxes, some retired couples should consider whittling down their IRAs by making partial conversions to Roth IRAs while they are still healthy.

A third reason for Massachusetts residents to convert from an IRA to a Roth IRA is that there is a Massachusetts estate tax beginning at $1,000,000 of a person’s net worth at death, and no credit is given to the estate for the unpaid income taxes on the decedent’s IRA. The estate tax would be reduced or perhaps even eliminated if the IRA owner became responsible for paying the taxes on the IRA.

One Comment leave one →
  1. December 5, 2010 3:27 am

    Hi, can I quote some of the content found in this entry if I provide a link back to your site?

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