You may already be aware of the benefits of a Roth IRA conversion as it relates to putting together tax-free income for your own retirement. However, you may also want to think carefully about a conversion if you want to maximize what is left behind for your heirs. There is the potential for converting your savings from a traditional IRA or 401(k) into a Roth IRA in order the leave a bigger legacy to your heirs.
A Roth IRA has funds that can be withdrawn tax-free, making it seem like the obvious choice for passing on benefits to future generations, but whether or not your beneficiaries come out ahead in terms of inheriting money in a tax-free or tax-deferred account, depends on numerous factors, such as how that you paid the taxes during the conversion, how long the funds remain in the Roth, the marginal tax rate for the heirs, and your own marginal tax rate when you make the conversion.
Consulting with an experienced financial professional is strongly recommended. However, a recent Vanguard study identified that the balance of an account dependent on various factors meant that someone who inherited a Roth IRA at age 60 might have a tax-free balance of approximately $340,000, as opposed to a beneficiary whose account owner ignored the conversion, in which the beneficiary only received $323,000. Of course, your final numbers will depend on your own situation, but this illustrates why it’s so important to have an estate planning attorney who can help you identify your next steps. A lawyer will analyze your unique situation to determine a strategy.