The question most pre-retirees ask about Roth conversions is whether they will come out ahead. It is a fair question and it has a real answer, though the answer depends on assumptions about future tax rates that nobody can make with confidence.
There is a second question that often matters more, particularly for households that intend to leave something behind. It gets asked far less often.
The question is what your heirs actually receive.
What the SECURE Act Changed
Before 2020, a beneficiary who inherited an IRA could generally stretch distributions across their own lifetime. The account stayed invested, the tax treatment continued, and the required withdrawals were small.
The SECURE Act changed that. Under current law, most non-spouse beneficiaries are generally required to fully distribute an inherited IRA within ten years of the original owner’s death. Spouses and certain eligible designated beneficiaries are treated differently.
For a traditional IRA, those distributions are taxable income to the beneficiary in the years they are taken.
Why the Timing Is Usually Bad
Consider who typically inherits. In most cases it is adult children, often somewhere between their forties and their sixties. That is frequently the period of their highest lifetime earnings.
A ten year distribution requirement layered onto peak earning years may push a beneficiary into higher brackets during exactly the stretch when they are least able to absorb it. The inheritance arrives, and a portion of it is consumed by a bracket the beneficiary did not choose to occupy.
The original account owner, meanwhile, may have been in a considerably lower bracket during the years when a conversion was available.
How a Roth Changes the Picture
An inherited Roth IRA is also generally subject to the ten year rule for most non-spouse beneficiaries. The clock is the same.
The tax treatment is not. Qualified distributions from an inherited Roth IRA are generally income tax free.
This means a beneficiary may be able to take the full account across ten years without those amounts adding to taxable income. The tax was already paid, typically by the original owner, and typically at a rate the owner had some ability to choose.
What That Means for the Conversion Question
For an account owner in the years before required minimum distributions begin, a partial Roth conversion involves paying tax now at current rates on an amount moved from a traditional IRA into a Roth.
Evaluated only against the owner’s own lifetime, the analysis is a rate comparison and the answer is genuinely uncertain.
Evaluated across two generations, the comparison changes. It becomes a comparison between the owner’s current rate and the beneficiary’s likely future rate during their peak earning years. For many households those are not close.
That does not make conversion the right answer. It makes it a different question than the one most people are asking, and one worth asking deliberately rather than by default.
The Factors That Actually Decide It
Whether a conversion makes sense depends on current and projected tax rates for both generations, account size, the owner’s timeline, liquidity available to pay the conversion tax without touching the account, state tax treatment, charitable intent, and the overall estate plan.
Charitable intent in particular can flip the analysis. A traditional IRA left to a qualified charity is generally received without income tax, which can make the traditional account the more efficient asset to give away and the Roth the better one to leave to family.
This is the kind of question that benefits from being worked through against actual numbers rather than general principles.
The Planning Window
Many Scottsdale area households between the ages of 52 and 72 sit inside what Outwitting the IRS calls the Sweet Spot. It is the stretch when taxable income is often lower than it will be once Social Security and required distributions are both running.
For anyone considering conversion as part of a legacy strategy, that window is the period when the arithmetic is most likely to be favorable, and it does not stay open indefinitely.
The first section of Outwitting the IRS is free at https://cleardirectioninvestments.com/outwitting-the-irs-book/. The Roth conversion chapter is in the complete book, available on Amazon at https://www.amazon.com/dp/B0GX3CSSWJ.
Clear Direction Investments works with families and business owners in Scottsdale and the Phoenix metro who are thinking about both what they build and what gets passed on. A 15-minute introductory conversation is a reasonable first step. Take the first step at https://cleardirectioninvestments.com/take-the-first-step/.
