My adult kids are big earners. Should I do a Roth conversion now so they aren't taxed as much on their inheritance?

By Beth Pinsker

Inherited IRAs can create a tax liability for heirs, but this should not be your first concern

It can be hard to decide which way to go on a Roth conversion in retirement.

Got a question about retirement? Fill out our new questionnaire or write to me directly at beth.pinsker@marketwatch.com (please put "Fix My Portfolio" in the subject line).

Dear Fix My Portfolio,

Our two children and their spouses are big earners, and I'm thinking about what we might leave behind to them. I'm 70 and have started Social Security already, and my spouse is 66 and is waiting until 70 to claim. I have a handle on Medicare surcharges and the $6,000 senior additional deduction rules. We keep our income under the New Jersey limit for tax-sheltered income, which results in no state tax for us. Whatever is left is in tax-sheltered accounts that would go to the kids and be highly taxed as opposed to our tax rate. An inherited IRA complicates the Roth solution during this period between retirement and required minimum distributions. I want to know that I have not missed something tax-wise.

Thinking Ahead

Dear Thinking Ahead,

You are definitely on the ball. You are thinking through all the conditions you should to figure out if and when you should do a Roth conversion. Perhaps what you are missing is patience.

I understand the urge to do something. You indicated in your answers to our new MarketWatch Retirement Questionnaire that you're managing your money on your own and are keeping track of most of your accounts either on your workplace retirement plan's web interface or on your own spreadsheet. This is a high level of engagement that should serve you well. You're also seeking out answers and trying to think ahead. All of this is exactly what it takes to successfully execute your retirement plan.

When retirees arrive at this place where they have everything mapped out and now it's time to just work the plan, they can get stymied. You think you're supposed to be doing something, but it's possible that what you should be doing is just proceeding onward as planned.

The worry you have about your tax rates versus the tax rates of your heirs is legitimate, but it doesn't necessarily need to be acted on right now. You and your spouse are still young. You should be considering your tax rate now versus your future tax rate, before you think about your future tax rate versus your children's. The former has one known factor - your current tax rate - while the latter has two unknowns.

In these years before you start taking required minimum distributions, which will be at age 73 for you and 75 for your spouse, Roth conversions could well make sense for you. It's possible - even likely - that your coming RMDs would push you into a higher tax bracket, and this kind of move would give you more options for tax diversification.

Say, for example, that you are in the 12% or 22% bracket now, with earnings below $211,400. That would keep you below the married threshold for the Medicare surcharges known as IRMAA. But once you start taking RMDs, even just a little extra income could push you beyond the $218,000 IRMAA cliff where the extra monthly charges start. Plus you'll pay income tax on your pretax distributions.

This is why financial advisers use the window between retirement and the start of RMDs to do multiyear Roth conversions. You can do this on your own with your spreadsheets or use do-it-yourself planning software. The key is to map out where you are in your current tax bracket and where RMDs will push you in the future. Then look at your available cash on hand to pay the extra tax due. If you can make use of the $6,000 extra senior deduction for both you and your spouse, all the better. That can offset some or all of the cost, and you can dig less deeply into your cash reserves to fund the conversion.

Thinking about your children

Once you settle all that, then you can think about your adult children. It might be a few years down the road before you act on this, however. Some retirees get to a point where their health is deteriorating or they are reaching very advanced ages and they can more clearly see what will be left after they die. At that point, you will have already secured what you need for your own living expenses and, potentially, your long-term-care needs, because you'll know the cards you've been dealt.

That's when you can think about ripping off the bandage and converting funds to Roth with an eye to the tax rate of the next generation. If you're still in the 24% bracket in 10 years, but your kids are steadily in the 32% or higher brackets, then it might make sense to convert over several years. It doesn't matter what those brackets are, as long as their bracket is above your bracket.

In his book "The Inheritance Playbook," Chad Holmes gives the example of parents who are in their 80s and have $894,000 in a tax-deferred IRA. They are in the 12% bracket, and their daughter is in the 22% bracket. If that money passes to the daughter, and she moves it to a brokerage steadily over the course of 10 years, as required, it's only worth $698,000 to her. If the parents convert it over six years, however, they'd pay $65,000 in tax and the daughter would inherit $1.1 million in a Roth account. "That would be roughly $195,000 in tax savings just by implementing some advanced tax strategies," Holmes wrote.

This may yet be something you try out, but perhaps just not right now. So all you're missing tax-wise is discipline and patience. Meanwhile, continue to keep an eye on your accounts and wait for your moment to act.

You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.

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More Fix My Portfolio

-- If I buy a house for $1 million in cash at 70, will I run out of money by 90?

-- I'm 75 and afraid to let my retirement fund dip below $1 million. Am I being too conservative?

-- How young is too young for a Roth IRA conversion? You may be surprised.

-Beth Pinsker

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08-08-26 1234ET