Roth Conversions in an Estate Plan

What a conversion is

A Roth conversion moves money from a traditional (pre-tax) IRA into a Roth IRA. A Roth conversion is included in gross income to the extent required by IRC § 408A (IRC § 408A), so you pay income tax on it now. Later distributions are tax free only if they are qualified distributions, including satisfaction of the applicable five-taxable-year requirement. Two features make the Roth distinctive for estate planning: Roth IRA owners have no lifetime RMDs (§ 408A(c)(5)), so the account can keep compounding untouched; but beneficiaries remain subject to the post-death rules in IRC § 401(a)(9) (IRC § 401(a)(9)).

The estate-planning case

Under the 10-year rule, a traditional account left to non-spouse heirs must be emptied — and taxed — within ten years, often stacking on top of the heirs’ own peak-earnings income (see the 10-year-rule page). Converting to a Roth during life shifts that tax to the owner, at the owner’s rate, and hands heirs an account they can draw down over ten years with no income tax on qualified distributions. There is an estate-tax angle too: paying the conversion tax removes those dollars from the owner’s estate, so for a taxable estate the tax payment itself acts like an efficient transfer.

When it tends to help

• The owner is in a lower bracket now than the heirs will be when they must empty the account — common for retirees in the years between retirement and RMD age.
• There is a long runway for tax-free growth before the money is needed or inherited.
• The owner can pay the conversion tax from funds outside the IRA, so the full converted balance keeps growing.
• The estate may owe estate tax, so shrinking it by the tax paid is an added benefit.

When it tends not to

• The owner is in a higher bracket now than the heirs will be — for example, heirs who are students, low earners, or a charity (which pays no income tax on a traditional IRA anyway, making a conversion pure waste).
• The conversion would spike one year’s income enough to raise Medicare premiums (IRMAA), raise modified adjusted gross income and expose other investment income to the net investment income tax, or push into a higher bracket — often addressed by converting smaller amounts across several years.
• The tax would have to be paid from the IRA itself, shrinking the balance and, if under 59½, risking an early-withdrawal penalty.
• The money is likely to be needed soon, leaving no time for tax-free growth to recover the tax paid.

A Roth conversion is treated as a retirement-plan distribution and is excluded from net investment income under Treas. Reg. § 1.1411-8 (Treas. Reg. § 1.1411-8). The conversion can increase modified adjusted gross income and cause other investment income to become subject to the 3.8% net investment income tax; the conversion amount itself is not net investment income (IRC § 1411).

It can’t be undone

One hard constraint: a Roth conversion is permanent. The ability to “recharacterize” — to reverse a conversion — was eliminated for conversions by the 2017 tax law (IRC § 408A(d)(6)(B)(iii)). Once you convert and pay the tax, you cannot change your mind if the account then falls in value or your bracket changes. That irreversibility is why conversions are usually done deliberately, often in measured annual amounts, rather than all at once — and why the arithmetic should be run carefully, with a qualified professional, before converting.

Sources & methodology