Roth Conversion in the Year of a Spouse’s Death
If you’ve recently lost your spouse and either inherited IRA assets and/or have substantial IRA assets of your own, it may be worth considering a ROTH conversion in the year of their passing to help reduce future taxes.
Why the Year of Death Matters
In the year of death, you can file as Married Filing Jointly (MFJ), which provides:
- Lower tax rates compared to filing as Single.
- A higher standard deduction.
Starting the following year, you will typically file as Single, which often results in:
- Higher tax rates on the same income.
- A smaller standard deduction.
This change can lead to a significant increase in the taxes you pay, especially if you have steady income sources like required minimum distributions (RMDs) or other taxable income.
How a Roth Conversion Can Help
A Roth conversion involves transferring funds from a pre-tax retirement account, such as a traditional IRA, into a Roth IRA. The converted amount is taxed as ordinary income in the year of the conversion, but future growth and withdrawals from the Roth IRA are tax-free.
In the year of death, the lower MFJ tax rates may allow you to convert funds at a lower tax rate than the rate that will apply to withdrawals in future years when you file as Single. For example:
- If RMDs and other income would push you into the 32% bracket as a Single filer next year, but you are currently in the 24% bracket, consider converting enough to “fill up” the 24% bracket this year.
- This reduces the taxable income you’ll face in future years and helps mitigate the impact of higher tax rates after switching to Single status.
Considerations Before Converting
While a Roth conversion can be a powerful tool, it’s essential to plan carefully:
- Tax Payments: A Roth conversion increases your taxable income for the year, so you may need to adjust your estimated tax payments to avoid penalties and/or prepare for a higher tax bill on April 15th.
- IRMAA (Medicare Premiums): Be mindful of income thresholds that could raise your Medicare premiums. If your income exceeds certain levels, you may pay more for Medicare Part B and Part D.
- Timing: The opportunity to convert at lower MFJ tax rates is only available in the year of death. Acting before year-end is crucial.
A Compassionate Reminder
Taking advantage of a Roth conversion in the year of death can help reduce future taxes, but it’s understandable if this feels overwhelming during a difficult time. A trusted advisor can guide you through the process and help to ensure that everything is handled properly.
Even so, if you can’t address this right now, that’s okay—skipping a Roth conversion may mean paying more tax in the future, but it’s not catastrophic. Focus on what’s most important and know that help is available when you’re ready.
Core Wealth Management is a fee-only wealth management firm located in Jupiter, FL. Our CFP® professionals provide investment management, financial planning and advisory services, while always strictly abiding by the highest fiduciary standards. For more information, contact us today at 561-491-0231.
Todd Schanel, CFP®, CPA, CFA is the Principal and Director of Investment Advisory Services at Core Wealth Management.
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