How a Roth Conversion Can Save You and Your Heirs Thousands
With a Roth, you can avoid RMDs and let more of your money grow tax-free.

If you have an individual retirement account (IRA), you probably already know about required minimum distributions (RMDs). For traditional IRAs, including Simplified Employee Pension (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE), you must take your first RMD in the year you turn 70½ or by April 1st of the following year from when you reach 70½.
Converting your traditional IRA to a Roth IRA can help you avoid RMDs and significantly benefit your children and grandchildren.
The conversion is treated as a taxable distribution, meaning you'll owe income taxes on the amount converted in the year you convert. (On the bright side, the rate might be lower if you're already retired.) Still, Roth IRAs are great because the money in the account can grow tax-deferred and any future withdrawals are tax-free to you and your heirs.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
To exemplify the benefits of a Roth IRA conversion, consider this scenario: Imagine two fathers at the age of 65, both in a 28% tax bracket. Both fathers have $100,000 in each of their IRAs and $28,000 in a separate taxable account. The first father uses the balance of the taxable account to convert his IRA to a Roth IRA. The other does not convert and keeps his funds in his SIMPLE account.
Over time, the first father's Roth IRA account grows tax-free, and he does not take any RMDs. The father with the SIMPLE begins taking out his RMDs at age 70.
When both fathers die at age 90, both accounts are 25 years old, and the children must begin taking their RMDs. The child who inherited the Roth account has about $685,000, if the annual rate of return was 8%. The child with the SIMPLE has nearly $217,000.
What made such a significant difference in account value? The SIMPLE father and child paid taxes on their RMDs. The father with the Roth IRA didn't take any RMDs, and his child was able to take withdrawals tax-free.
Other benefits to converting your traditional IRA to a Roth IRA: doing so can eliminate or lower federal and state taxes, drop your estate tax bracket and allow you to make earnings from depressed market values on stocks.
Talk to Your Beneficiaries
To ensure that your Roth IRA conversion earnings continue with your beneficiaries, prepare them and encourage them to be a part of the planning process now. If you want your heirs to stretch this tax-free shelter over their lifetimes, talk with them now about the rules they must follow after you die.
IRA account beneficiaries are subject to special distribution rules. Their first RMD is due December 31st of the year after the original account holder's death, or by December 31st of the year the deceased would have reached the age of 70½ (whichever option is the latest). If the original account holder died after reaching 70½, the beneficiary must take his or her first RMD before December 31st of the year after the death.
Most laws for account beneficiaries tend to favor spouses, and they have more choices in the event that they inherit an IRA account. They can merge inherited traditional IRAs into their own Roth IRA account, whereas non-spousal beneficiaries cannot.
Non-spousal beneficiaries must set up an "inherited IRA" under the name of the original account holder. Multiple beneficiaries each need their own "inherited IRA" account so that each heir can base their RMDs on their own life expectancies; otherwise, their RMDs will be generated based on the life expectancy of the oldest beneficiary—which may cause a significant amount of the account value to be lost.
Also, before you convert, consider whether your tax bracket is higher than your child's. For instance, if you're in a 28% tax bracket, and your child is in a 10% tax bracket, it may not make sense to convert. However, most retirees are in a 0%, 15% or 25% tax bracket while their children are in a 33% tax bracket—in which case, a conversion would be beneficial.
Finally, if you decide to convert, use non-IRA funds to pay the income tax owed upon conversion to maximize IRA account value for tax-deferred earnings.
As of 2010, there are no longer income limits that prevent you from converting your traditional IRA to a Roth IRA, so now is the time to take advantage of this account and its growth potential.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Carlos Dias Jr. is a financial adviser, public speaker and president of Dias Wealth, LLC, headquartered in the Orlando, Fla., area, but working with clients nationwide. His expertise spans a diverse clientele, including business owners, retirees, lottery winners and professional athletes with wealth management, tax planning, estate planning, long-term care, annuities and life insurance. Carlos has contributed to Kiplinger, Forbes and MarketWatch, and his work has been featured in CNN, CNBC, The Wall Street Journal, U.S. News & World Report, USA Today and other publications. He’s spoken at various CPA societies across the United States, and Carlos’ presentations often focus on innovative tax strategies, retirement planning and asset protection, providing valuable knowledge to accountants, attorneys and financial professionals.
-
Stock Market Today: Solid Signals Lift Stocks Despite Tariff Noise
Markets are whistling over the White House in an ongoing display of corporate America's enduring ability to survive and advance.
-
Amtrak Joins Prime Day With Deals on Fares — But You’ll Have to Act Fast
Prime members can score 20% off midweek fares — what travelers should know before booking.
-
Key to Financial Peace of Mind: Think 'What's Next?' Rather Than 'What If?'
Even if you've hit your magic number for retirement, it's hard to stop worrying about money. Giving it a clear purpose is one way to reduce financial anxiety.
-
Three Estate Planning Documents a Business Owner Can't Afford to Skip
A business owner's estate plan should protect the company and its employees as well as the entrepreneur's heirs. These three documents are critical.
-
Financial Fact vs Fiction: Why Your 'Magic Number' Isn't Actually Magical
Do you think you're diversified if you're invested in the S&P 500 and Nasdaq? Do you think your tax rate will fall in retirement? Think again — and read on for other myths that could be leading you astray.
-
Opportunity Zones: An Expert Guide to the Changes in the One Big Beautiful Bill
The law makes opportunity zones permanent, creates enhanced tax benefits for rural investments and opens up new strategies for investors to combine community development with significant tax advantages.
-
Five Ways Retirees Can Keep Perspective Through Market Jitters
Market volatility is a recurring event with historical precedents (the dot-com bubble, global financial crisis and pandemic), each followed by recovery. Here's how people who are near or in retirement can navigate economic uncertainty.
-
I'm a Financial Strategist: This Is the Investment Trap That Keeps Smart Investors on the Sidelines
Forget FOMO. FOGI — Fear of Getting In — is the feeling you need to learn how to manage so you don't miss out on future investment gains.
-
How Advisers Can Steer Their Clients Through Market Volatility (and Strengthen Their Relationships)
Financial advisers need to be strategic when they communicate with clients during market volatility. The goal is to not only reassure them but to also help them avoid rash decisions, deepen your relationship with them and build lasting trust.
-
The Hidden Costs of Caregiving: Crisis Goes Well Beyond Financial Issues
Many caregivers are drained emotionally as well as financially, leading to depression, burnout and depleted retirement prospects. What's to be done?