The decision to execute a Roth conversion and generate taxable income is more complicated than it may seem at first, especially when you consider it in the context of your overall estate plan. You’re essentially making a bet that paying tax today is better than having someone else pay any income and/or estate taxes on it in the future. You want to consider your options to make sure you are being tax-smart with your IRA.

Before you decide to convert, be sure you and your financial advisor have answered the following three questions.

Will Your Roth Outlive You?

For estate planning purposes, the two main reasons for Roth conversions are to bequeath tax-free assets and reduce your taxable estate. Therefore, it’s important to project your spending lifestyle relative to your net worth to understand how your assets may be spent down in retirement. This allows you to determine what assets are likely to be part of your remaining estate.

If you project you’ll spend all of your IRA assets in retirement, the decision to convert should primarily be based on marginal tax rates over your lifetime. For example, as retirement approaches, you will likely want to delay any conversions until after you’ve stopped working, as you’ll likely be in a lower tax bracket at that time.

If you project that your Roth will outlive you, make sure the conversion tax hit is worth the eventual savings for whoever inherits the account. If your beneficiary will be in a higher tax bracket when the inheritance occurs, they may be better off if you incur the tax liability today at your lower tax rate. If, however, your beneficiary’s tax rate when the inheritance occurs will be lower than your current tax rate, a conversion perhaps isn’t worth it. In that situation, you might want to consider leaving those assets in a Traditional IRA; your beneficiary is better off paying tax on the withdrawals at their lower rate.

Is There a Plan to Maximize the Roth Benefit?

If you plan well, the benefits of a Roth conversion can span multiple lifetimes. It’s important to communicate this to your spouse in order to further extend the account’s tax-free growth.

Consider Jack’s case: Jack is 63 when he converts his Traditional IRA to a Roth. He passes away at age 75 and names his wife Barbara (age 75) as the sole beneficiary. If she depletes the account, the benefits of tax-free growth end there.

Alternatively, since spousal beneficiaries of Roth IRAs can stretch distributions over their lifetimes, Barbara could choose to let the Roth account grow on a tax-free basis for the rest of her lifetime while taking minimal distributions. If she dies at age 92 and leaves the account to her daughter, Carol, as the sole beneficiary, Carol will inherit a nest egg that has benefitted from 29 additional years of tax-free growth.

However, following the passage of the SECURE Act, by law, Carol is required to deplete the entirety of the account within 10 years of inheriting it. This means that some careful planning could be required to make sure Carol is able to maximize her payout within the rules for a Roth IRA inheritance.

Will Your Estate Benefit a Charity?

Charities are unique in that they generally don’t pay any income taxes on donations received. Therefore, a Traditional IRA (not a Roth) is an ideal asset to leave to charity. When you own an IRA, it’s like a joint account with Uncle Sam, since taxes are owed on every dollar distributed. But when the account is transferred to charity, Uncle Sam no longer gets a share–the charity receives the entire account.

Consequently, converting to a Roth and naming a charity as beneficiary would be a mistake. In this case, the Roth conversion created an unnecessary taxable event, paid tax to Uncle Sam, and reduced the amount received by the charity.

These three questions merely scratch the surface of other factors that may need to be considered. Keep in mind that your estate at age 45 is likely very different from the one you’ll have at age 65 and 85; your accounts change, you spend/inherit assets, and you gain/lose family members. The more complex your situation, the more you’ll benefit from working with a skilled financial advisor, tax specialist, and estate attorney.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.