Converting a regular IRA to a Roth IRA may provide tax-free income in the future, but an upfront tax bill needs to be paid. Converting a $300,000 IRA, for example, might generate a tax bill of around $120,000. If you don’t have enough cash for a conversion, consider buying a life insurance policy for that purpose, payable to your spouse. You’d also leave your IRA to your spouse, who can roll the account to her own IRA after your death.
Subsequently, your surviving spouse can use the life insurance death benefits to pay the tax on a Roth IRA conversion. After this conversion, your spouse will not be required to take any further distributions from the Roth IRA, which may continue to grow. At her death, the Roth IRA can pass to your children, who can take required (but tax-free) distributions over their life expectancy. Depending on investment returns, your children may receive many times the amount of your original IRA, tax-free. They’ll be ahead of where they would be if they were receiving taxable distributions from a regular IRA that they inherited.
