Do you have retired parents with an IRA they don’t need to tap? Some income-shifting strategies might pay off.
Suppose, for example, that Art and Beth Carson are in their 40s, with a substantial joint income. Beth’s father has $100,000 in a traditional IRA, from which takes only the required minimum distribution (RMD) each year, about $4,000. Counting the RMD, Beth’s parents will have about $45,000 in taxable income this year.
In 2011, married couples filing joint tax returns are in the 15 percent tax bracket with up to $69,000 of taxable income. Therefore, Beth’s father can convert an additional $24,000 of his traditional IRA to a Roth IRA this year and stay in the 15 percent bracket. He might implement a $24,000 Roth IRA conversion and name Beth as the Roth IRA beneficiary.
Beth’s parents will owe another $3,600 in tax on the Roth IRA conversion: 15 percent of $24,000. Art and Beth might make gifts to her parents to help with the tax bill. Similar conversions might take place in future years until the entire $100,000 traditional IRA has been converted to a Roth IRA at a $15,000 tax cost.
Eventually Beth will inherit her father’s Roth IRA. Five years after the conversions, any withdrawals she takes from this Roth IRA will be tax free.