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Roth Conversions and What You Need To Know Beyond the
Numbers
Overview: A number of issues should be reviewed as you
determine if a conversion to a Roth IRA is appropriate for you. Roth
conversions, in addition to income tax and cash flow issues, raise asset
protection issues, beneficiary designation issues, estate tax apportionment
issues, and in some cases charitable planning issues, where appropriate, to
generate income tax deduction for a particular year.
Asset Protection: When an individual moves funds from a
qualified plan to an IRA, they leave the asset protection safe haven of an
ERISA protected plan. In some states, individuals may still have creditor
protection, in other states the protection may be diminished. In bankruptcy,
an individual is generally able to protect at least $1,000,000 of IRAs and
often an unlimited amount if the rollover can be traced to an ERISA plan.
However, the laws of many states are not clear as to asset protection
afforded to roll overs from an ERISA plan to an IRA and subsequently to a
Roth IRA. This can be an important legal issue!.
Estate Planning Considerations: The following issues must be addressed upon
a Roth Conversions.
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Beneficiary Designation Forms: Beneficiary designation
forms should be updated to coordinate the Roth IRA into the overall estate
plan. The conversion of all or a substantial portion of a regular IRA into
a Roth IRA may necessitate amendments to the overall estate plan. It is
critical that proper beneficiary designations are prepared to ensure
separate shares and to maximize the opportunity for post-death stretch
out.
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IRA Trusts: Because of the additional investment of the
conversion, in the form of upfront taxes, many clients would be well
advised to take the additional step of leaving the Roth IRA to a trust for
the benefit of their loved ones rather than outright to them. An IRA left
outright to a beneficiary has limited asset protection in many
jurisdictions whereas the IRA left in a properly drafted trust provides
the beneficiary with additional asset protection.
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Unified Credit and GST Planning: When integrating a
Roth IRA with an overall estate plan, this will generally necessitate
additional GST planning along with coordination of the funding of the
Family/Bypass Trust. In general, a Roth IRA is the best asset to leave to
a GST exempt trust for the benefit of one’s children and/or grandchildren.
In fact, whenever the situation mandates the IRA assets be left in trust,
it is often better to convert to a Roth IRA & pay the taxes at the IRA
owner’s level.
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