Just to review – what is a Roth IRA? A Roth IRA is funded with “after tax” dollars, grows free of all income and capital gains taxes, and produces no income tax upon withdrawal. Sounds pretty good, doesn’t it? Most retirees, however, do not have much if any amount in a Roth IRA. So, while it sounds great, most will say it cannot apply to them. Not so!!

How can you get money into a tax free Roth IRA account? That’s easy – you choose to pay some tax now rather than later. And there are two ways to do this.

First, you have to have earned income. If you are retired you probably don’t have earned income, but maybe you have a small part time job that you have just to keep busy. If so, you can contribute that earned income, after tax, up to the current maximum of $6,500 for those over 50.

The other option is to “convert” part or all of your existing IRA to a Roth IRA. This means transferring some money out of your existing IRA into a Roth account and paying tax on it. Why would you want to pay more tax than you already do when you may be over 70 1/2 and taking Required Minimum Distributions?

People I talk with who are in the over 70 age group are concerned about many things – tax is high on this list, but equally high is a concern for their adult children and grandchildren and how best to leave a financial legacy.  The gift of a Roth IRA may be the most appreciated financial legacy you can leave.

The beneficiaries of a Traditional IRA cannot convert that IRA to a Roth; they are locked into taxable required distributions that can be taken over their lifetime, but every dollar is taxed. If, however, you can convert part or all of your IRA to a Roth IRA now a little bit of magic happens.

  1. No matter what tax bracket your beneficiaries may be in, your Roth conversion gives them the same potential lifetime income stream – but this time all tax free.
  2. Money can stay in a Roth IRA with no Required Minimum Distributions. You can think of this money as available to you, but managed with a “next generation” time frame geared to growth.

If you have a portion of your estate that you know is going to your children, that you will never use, the Roth IRA option is a gift that will appreciate and be appreciated for many years to come.

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