Converting is not that big of an issue, technically. It can be a big issue financially, however, because you face the prospect of paying those taxes in the year of conversion. Above all, however, the conversion has to make sense.

Consider this scenario:
For a married couple who want to convert to a Roth but who do not have the money to pay the taxes, one strategy may be to purchase a life insurance policy that we can use is a spousal Roth conversion.

Let’s say the husband and wife are both living, it’s the husband’s IRA account, and the couple does not need the money in the account. When it comes time to take the required minimum distributions, one option may be to purchase a life insurance policy on the husband in the amount projected to be necessary to pay the taxes upon his death so that his wife can convert the account to a tax-free Roth.

Let’s say that it would require $100,000 in taxes to convert a $400,000 account. When the husband dies, the wife inherits the $400,000, and she also receives a $100,000 death benefit. She could use the life insurance money to pay the taxes, and now she has a $400,000 Roth. That’s a way to accomplish a conversion without having to come up with the money right away.

Make sure you discuss with your financial advisor if converting to a Roth IRA makes sense for you and your family. This approach may not be right for everyone. Visit www.familywealthadvisory.com for more resources and advice on financial planning.

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The beneficiary of what is called “an inherited IRA” can opt to continue the tax-deferred growth; the rules for required distributions allow for such a “stretch” provision**. He or she can take distributions over a fixed period of time, based on life expectancy. For example, a 20-year-old beneficiary can take payments over 63 additional years. Special rules apply to spousal beneficiaries after that.

A word of caution, though: Given the choice of a lump sum or tax-deferred distribution (and I have seen this happen many times), most heirs seem to know only four words: “Show me the money.” If you suspect that will be the case, it’s possible, to name a trust as the beneficiary of your IRA to establish some control over how distributions will be taken after your death. You should consider whether family situations call for such action.

Most heirs will not know that a stretch is available to them—and if they do, they could fail to get the full benefit from it. IRA owners can do themselves and their heirs a big favor by setting this up in advance, in some way, shape, or fashion. They could reach out to the heirs, while the account owner is still alive, and explain the distributions available to them and to whom they can go to for guidance when the time comes for distribution.

Mutual of Omaha Investor Services, Inc. and its representatives do not provide tax or legal advice; therefore it is important to coordinate with your tax or legal advisor regarding your specific situation.

*IRS – www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf (Revised 8/12/2014)
**Investopedia – www.investopedia.com/terms/s/stretch-ira.asp (Revised 8/12/2014)

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