Thirteen years ago, Margie Owen of Atlanta had a large tax-deferred account that she intended to leave to her children someday.
The retired educator didn’t want to create a tax burden for her heirs. So each year, she has taken a chunk of her tax-deferred money, paid taxes on it and converted it to tax-free Roth IRA money. Almost two-thirds of her investments now are in the Roth account, and her children won’t pay a dime of taxes when they take the money out in the future.
“I’m older and have everything I need,” says Ms. Owen, 74 years old. “The Roth has turned out to be wonderful thing to do for my children.”
In Roth conversions, people pay income tax on each dollar they convert. The conversions can make particular sense for early retirees who want to avert higher taxes in the future for themselves or their heirs.
If you have a tax-deferred account, you must begin taking required minimum distributions at age 72. Those distributions—even if you don’t need the money—can push you into a higher tax bracket or force you to pay higher Medicare premiums. By contrast, withdrawals from a Roth aren’t taxed and you won’t have any required distributions. It is a tax-free money bucket that you can tap whenever needed or leave as a legacy.