Inside a $4M Estate Plan: Why This Family’s Roth Strategy May Unravel

Dear Wealth Wise: We're in our 80s with $3 million in traditional IRAs and $1 million in Roth IRAs. We're doing Roth conversions up to the 24% bracket to limit IRMAA surcharges on our Medicare premiums. We want to leave our wealth as follows: 10% to gifts, 60% to our grown children and 30% to our grandchildren. We plan to use the Roth accounts to cover taxes on traditional IRA withdrawals during the 10-year withdrawal period. The adult children could use their traditional distributions for gifting if they don't need the money and keep their Roth invested. The grandchildren could use the Roth for taxes, as needed, or keep it invested for the 10-year period. Is this a good plan? — Splitting Heirs

Dear Splitting Heirs: In the coming years, an estimated $124 trillion of assets is expected to pass from older generations to younger ones and charities. For families with significant assets to transfer, strategic planning is crucial.

Here, a couple in their 80s with a reported $4 million in wealth is looking for an efficient way to leave an inheritance while minimizing their heirs' tax burdens. They've come up with a strategy they think works, but is it solid? Here's what our experts say.

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The Roth conversion strategy may or may not be optimal

In the context of estate planning, Roth conversions can be a powerful tool. By converting traditional retirement account dollars to a Roth, savers can get taxes out of the way so their heirs are able to withdraw from their windfalls tax-free.

Jesse Giordano, co-founder and managing partner at Opal Wealth Advisors, says a Roth conversion could make sense for our couple, but it's not a given.

"I'd start by comparing the couple's all-in marginal rate … with what the heirs might pay drawing down an inherited IRA over 10 years," he says. "Converting up to the point where those rates cross is one reasonable target."

Paul Pradel, wealth manager and partner at Merit Financial Advisors, agrees that the Roth conversion strategy has merit, but suggests digging deeper.

"If there are multiple children and if they are in lower tax brackets, it might make less sense to do the Roth conversions and instead pass on more in [traditional] IRA balances due to the lower tax impact to the children," he says. "If, however, there are fewer children or, regardless of the number of children, they are in higher tax brackets, then the Roth conversion would have more merit."

Giordano, meanwhile, says that while not wanting to pay more for Medicare is understandable, our couple should try not to focus too much on IRMAAs.

"IRMAA is a cost to manage, for sure, but it probably shouldn't drive the decision on its own," he explains. "With $3 million in IRAs, their RMDs could be around $190,000, so they may already be paying a surcharge."

Giordano also suggests trying to do a Roth conversion while both spouses are alive for one specific reason.

"Starting the year after the first spouse dies, the survivor generally files single, and the brackets and IRMAA thresholds are cut in half," he explains.

Be careful with who gets what

In theory, it's good that our couple has allocations in mind for their wealth. But they may want to tweak the approach, Giordano says.

"Rather than splitting every account evenly, they might consider matching account types to heirs," he explains.

"Traditional dollars could go to charity first, then to heirs in lower brackets. Roth dollars may be better suited to higher-bracket heirs and to any trusts for grandchildren, since trusts can reach the top bracket quickly. Young grandchildren also may not be in the low bracket the couple expects, because the kiddie tax can apply their parents' rate to inherited IRA withdrawals."

Giordano also does not recommend using inherited Roth accounts to pay taxes on traditional IRA withdrawals that must come out under the 10-year rule.

"The inherited Roth has no annual RMDs, so it can stay invested until Year 10. In most cases, the Roth [should be] the last dollar to spend," he explains.

An inherited Roth IRA can grow tax-free for an entire decade, so it pays to take advantage of that.

QCDs should be part of the strategy

Assuming the couple's planned 10% for "gifts" is intended for 501(c)(3) charities, they have a prime opportunity. Rather than having that money transfer upon their death, they can give generously now while minimizing taxes, supporting their Roth conversion strategy.

"Given their IRA balances and regardless of whether they continued the Roth conversion strategy, they could utilize qualified charitable distributions (QCDs) to reduce taxable IRA distributions or to simply enjoy being charitably active during their lifetimes," Pradel says.

The QCD limit for 2026 is $111,000 per individual (or up to $222,000 for a married couple if both hold IRAs), which offers plenty of flexibility to give to charity now while satisfying RMDs.

A word from Wealth Wise

Both of our experts point out that we don't know much about this couple, such as how many kids and grandkids they have, what income streams they have beyond their IRAs, and what tax deductions they're currently eligible for. But on a basic level, it seems that with a few tweaks, their inheritance plan generally works.

Still, Giordano cautions, "Today's tax rates are permanent under current law, but Congress can change that. Anyone considering these strategies should work with their tax and estate planning advisers to see what fits their situation."

Another wild card factor in this inheritance plan is the potential need for long-term care. Our couple doesn't indicate whether they have long-term care insurance, but if they don't, a good portion of their assets may go toward that expense. That doesn't necessarily mean their overall strategy needs to change, but it's an important point to consider when they run through their numbers.

Read More

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