When most people think about Roth conversions, they focus on reducing taxes during retirement. While that’s important, this narrow view misses a key opportunity: Roth conversions for legacy planning can be a powerful strategy, especially for families who want to protect their loved ones from future tax burdens.
What Is a Roth Conversion?
A Roth conversion moves money from a Traditional, pre-tax retirement account—such as an IRA or 401(k)—into a Roth IRA. You pay income taxes on the converted amount in the year of the conversion. Once in the Roth, growth and withdrawals are tax-free (as long as you’re age 59½ and meet the five-year rule).
Why Roth Conversions for Legacy Planning Make Sense
Why pay taxes now when you could defer them? Because waiting may mean paying more later or leaving your spouse and children with a larger tax bill. With a Roth IRA, you gain more control over timing and outcomes.
Traditional retirement accounts defer taxes, but the IRS eventually collects—either from you or your heirs. Required Minimum Distributions (RMDs) are the government’s way of ensuring taxes are paid.
The Growing Tax Burden of RMDs
Under current law:
- RMDs start at age 73 (if born 1951–1959)
- At age 75 (if born in 1960 or later)
These distributions increase over time, even if you don’t need the income. And they can:
- Push you into higher tax brackets
- Trigger Medicare surcharges
- Limit financial flexibility
Roth IRAs avoid RMDs, allowing assets to grow tax-free for longer and giving your heirs a more valuable legacy.
The Widow’s Penalty: A Hidden Risk for Surviving Spouses
One of the biggest risks in retirement planning is a little-known tax issue: the Widow’s Penalty. When one spouse dies, the surviving spouse typically shifts to single tax filing, which cuts deductions and tax bracket thresholds in half.
That means more of your income gets taxed at higher rates, even if your overall income decreases. If the surviving spouse inherits Traditional IRAs with RMDs, the tax impact is even more severe.
Example:
- A married couple (both 90) with $1 million in Traditional IRAs and Social Security income files jointly and owes about $10,721 in federal taxes.
- After one spouse dies, the survivor inherits the IRA and receives less income—but now owes $15,901.
That’s over $5,000 more in taxes on less income.
Proactive Roth conversions while both spouses are alive and filing jointly can reduce this risk.
What the SECURE Act Changed About Inherited IRAs
Before 2020, children could stretch inherited IRA distributions over their lifetime. The SECURE Act ended this option for most beneficiaries. Now, heirs must fully withdraw inherited IRA funds within 10 years.
Starting in 2025, annual withdrawals will also be required during those 10 years if the original account holder had begun RMDs.
Many children inherit IRAs during their peak earning years—their 40s through 60s. These extra taxable distributions can push them into higher tax brackets, reducing the net inheritance.
Roth IRAs are still subject to the 10-year rule, but withdrawals are tax-free. That’s why converting pre-tax assets during your lower-income years can benefit your children later.
Is a Roth Conversion Right for You?
Roth conversions for legacy planning aren’t one-size-fits-all. They depend on:
- Your current and future tax rates
- Life expectancy
- Income needs
- Estate planning goals
A conversion today could mean a tax benefit for your loved ones tomorrow—but it must align with your full financial picture.
If you’re unsure, consult a financial advisor or tax professional who understands how to balance tax efficiency with long-term planning.
Final Thoughts
Roth conversions aren’t just about your retirement; they’re a tool for intergenerational wealth planning. They help reduce tax burdens, protect a surviving spouse, and preserve more wealth for your heirs.
Take the time to review your strategy. It could be one of the most impactful legacy planning decisions you make.
Guest post provided by J.T. Stilley, CFP®, Partner and Co-Founder of TrustStone Wealth Partners, LLC. TrustStone Wealth Partners, LLC is a family-owned wealth management firm based in Chapel Hill, specializing in investment management and comprehensive financial planning services for households nearing or in retirement. As fiduciaries and CERTIFIED FINANCIAL PLANNERS™, TrustStone’s team is committed to putting clients’ interests first and building lasting relationships founded on trust and white-glove service.
