Retirement Plans: Will A Roth IRA Conversion Help My Beneficiaries?

If your income is too high to contribute to a Roth IRA, you have likely heard of the “backdoor” way of taking advantage of a Roth. By converting money from a traditional IRA into a Roth, you gain some distinct tax advantages in retirement as well as benefits for your heirs. A Roth IRA conversion is not for everyone, however. You do have to pay income tax on any money you convert the year you do the Roth IRA conversion. Some people space out the Roth IRA conversion over a period of several years to stagger the taxes due. But when it comes to Roth IRA rules and ramifications for your beneficiaries, it’s wise to consult with an estate planning and elder law attorney. If you have been contributing to a Roth IRA for many years, you need to make sure your retirement plan includes updated information on the chosen beneficiaries. An updated will is another critical part of estate planning as you grow older. Before deciding to convert, consider different rules and facts regarding a Roth IRA as part of your estate planning.

Leaving a Roth to a spouse

Your spouse who inherits your Roth IRA may move the money into a new or existing IRA in his or her own name. Your spouse can also put the money into an inherited IRA. If you want to leave your Roth IRA children instead of a spouse, talk to an elder law attorney specializing in Michigan law and retirement planning. If your spouse inherits your IRA, it’s extremely important he or she rolls the assets into his or her own IRA. If the account remains an “inherited IRA,” the assets are vulnerable in bankruptcy, according to experts.

Protecting your legacy

Unfortunately, an inherited Roth IRA is not protected in bankruptcy. If your beneficiaries experienced financial hardship, or lawsuits, a Roth IRA is not the best place to park their inheritance. According to an article by, the U.S. Supreme Court found inherited IRAs don’t receive protection. Your beneficiary’s inherited account is vulnerable to creditors. Your elder law attorney can come up with solutions to make sure your beneficiaries not only inherit but keep the money you left for them.

Knowing your tax situation

Retirement plans are great because they are generally protected in bankruptcy. Also, money inside a retirement account typically grows tax-free. With a Roth IRA, you get the benefit of being able to take out your money in retirement without paying any income taxes. With a traditional IRA, you lower your taxable income the year you make the contributions. So, does a Roth IRA conversion make sense? According to a piece by, if you can’t pay the tax on a conversion without tapping the retirement account itself, you can’t afford to convert. If you think you’ll be in a low tax bracket in retirement, it isn’t as advantageous to convert. Another downside is the fact that converting from a traditional to a Roth could push you into a higher tax bracket the year you convert. The amount you convert gets treated by the IRS as ordinary income.

Because retirement plans have serious and complicated legal and tax implications, it’s always wise to consult with a lawyer. Elder law attorney Christopher J. Berry and the Elder Care Team can help you with a Michigan Retirement Plan Trust. Whether you have a Roth 401(k), traditional 401(k), traditional IRA or Roth IRA, it’s wise to have a legal expert review your retirement plans and how they will affect your future heirs. For more information on retirement plans and estate planning, please contact us.

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