Updated Tuesday, September 1, 2015 as of 2:09 PM ET

Estate Planning: Smart Roth Conversion Trick

Many financial planning clients have substantial IRAs, yet they have no need to tap the account for retirement income. Generally, they’ll take only required minimum distributions (RMDs) after age 70-1/2, to reduce the tax bill on unneeded income. This approach may result in a sizable traditional IRA being passed down to the next generation, who also must take RMDs.

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Comments (2)

Thanks for the article. I don't think much about Roth conversions for retired clients taking RMDs, but I will now. Usually Roth Conversions are executed for my younger clients wishing to diversify the tax status on their future income.

One question that popped up was regarding your statement "One approach is to convert a substantial amount of the traditional IRA one year, then recharacterize (reverse) just enough of the transaction the next year to wind up with the most tax-efficient Roth IRA conversion." I might be incorrect, but I seem to remember tax guru Ed Slott saying that if a client recharacterizes their Roth Conversion, they can't cherry pick a partial amount. Meaning, they either recharacterize the whole Roth Conversion or none of it.

Again, maybe I got this wrong but it should probably be looked into.

Posted by Greg L | Wednesday, August 20 2014 at 12:49PM ET
This is a useful article and I have used the strategy frequently for my clients and for myself. It is especially useful to convert recently depressed assets into Roth IRAs, so that taxes are paid based upon the low prices at the time of conversion and so that all future gains are tax free. As for the question above, the correct answer is to switch each security into a different Roth; you are permitted to have as many Roth accounts as you like. Whichever assets decline in value can then be recharacterized back into their original non-Roth accounts during the following calendar year prior to October 15.
Posted by StevenJon K | Wednesday, August 20 2014 at 1:20PM ET
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