How Tax Reform Changes to Roth IRA's Affects Estate Planning

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How Tax Reform Changes to Roth IRA's Affects Estate Planning

How Tax Reform Changes to Roth IRA's Affects Estate Planning

New tax laws will inevitably change whether some people take a standard deduction or itemize. For people concerned about their beneficiaries' financial futures, the tax laws also impact estate planning. Since the Roth IRA came on the scene as a retirement savings vehicle, many people enjoyed the benefits. High income earners who don't qualify to contribute directly to a Roth IRA often take the so-called "backdoor" route to funding a Roth IRA. Converting money from a traditional IRA to a Roth IRA is a great way for high-income people to shift money to the Roth. Even though the individual pays income when converting the money, the money then grows tax free in the Roth vehicle. According to a recent article by financialplanning.com, tax reform means several changes in 2018.

Roth conversions can't be undone

If you decide to convert a traditional IRA into a Roth IRA, consult with an expert. Crunch the numbers and make sure it's a wise move. Taxpayers are no longer allowed to undo Roth conversions, which is also called a "Roth recharacterization."

You pay the taxes upfront

When you convert money from a traditional IRA into a Roth, you pay the taxes upfront. Depending on your business and personal tax liabilities, one year might be a better year than another to convert money. People love the fact that Roth IRA's are free from income taxes in the future. It's especially positive for beneficiaries. Still, don't let the taxes become a stumbling block. For some people, it's best to convert a small portion each year until all of the traditional money is in the Roth account.

Another major attraction to the Roth IRA is the fact that it's free of estate taxes for most people. New tax reform laws boosted the estate tax exemption to $11.2 million for each individual. Couples may receive $22.4 million in tax-free funds as beneficiaries under the new laws. After 2025, lawmakers might decide to continue the trend. Otherwise, the amounts revert to the pre-2018 levels or about half as much. Converting to a Roth also makes it easier to leave tax-free money to grandchildren.

At the Law Offices of James C. Shields, we provide help with living wills, power of attorney, probate work and all facets of estate planning. For more information about how tax reform impacts your estate planning, please contact us.

Categories: Estate Planning
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