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Retirement

Roth IRA conversion can maximise financial legacy, says Atlantic Trust

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Owners of traditional individual retirement accounts can add value to their estates while maximising their financial legacies by converting them to a Roth IRA, according to Atlantic Trust.

When an individual dies, taxes are due on his or her estate if the estate is valued over the federal exclusion amount (currently set at USD5.34m).
 
While both traditional and Roth assets are counted as part of that estate, the revenue tax that was deferred during the person's lifetime comes home to roost.
 
When an individual makes a full conversion to a Roth IRA, ordinary income taxes and possibly the Medicare surtax are due on the total amount converted in that tax year, but paying income taxes now on converted assets removes them from the taxable estate, thereby reducing its size.
 
"Another benefit of converting a traditional IRA to a Roth is that Roth owners are not required to take required minimum distributions (RMDs) – the minimum annual amount that must be withdrawn from an IRA or other tax-deferred account beginning at age 70 ½ – allowing them to pass on more of their assets instead of having to spend them in retirement," says H Arthur Graper, managing director at Atlantic Trust.
 
Also unlike traditional IRAs, Roth IRA earnings can grow and be withdrawn tax-free under certain conditions. Heirs can even withdraw earnings tax-free regardless of their age or the age of the deceased account owner, as long as the Roth IRA conversion assets have existed for at least five years.

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