Roth conversions are usually framed as a retirement-planning decision.
Pay the tax today, or pay it later. Convert while your tax rate is relatively low, or leave the money in a traditional IRA if you expect your future rate to be lower.
But for retirees who expect to leave a significant portion of their retirement savings to their children, there may be another tax rate worth considering: their kids’.
That can turn a Roth conversion into an estate-planning decision.
The Same IRA, Two Very Different Heirs
Consider a 70-year-old retiree with a $1 million traditional IRA. She has sufficient income and other assets and expects much of the IRA will eventually pass to her two daughters.
One daughter is a teacher, while the other is a successful attorney.
For simplicity, assume each will ultimately inherit $500,000.
Under current law, most non-spouse beneficiaries generally must empty an inherited IRA by the end of the tenth year following the original owner's death. That can force heirs to recognize substantial taxable income during what may already be their highest-earning years.
Now suppose Mom has an opportunity to convert IRA dollars to Roth at a 24% federal marginal rate.
Should she?
The answer may look very different for each child.
The Teacher
Suppose the teacher is ultimately able to take inherited IRA distributions at an average marginal federal rate of roughly 22%.
If Mom converts the daughter's hypothetical $500,000 share at 24%, the conversion creates about:
$500,000 × 24% = $120,000 of federal tax
If instead the daughter eventually inherits the traditional IRA and those dollars are taxed at 22%, the comparable tax cost would be:
$500,000 × 22% = $110,000
In this simplified example, converting at 24% to avoid a future 22% tax doesn't create savings. It costs the family roughly $10,000 more.
A Roth may still have other advantages, and actual results depend on growth, timing and future tax law. But the point is important:
Roth is not automatically better simply because an IRA will eventually be inherited.
The Attorney
Now consider the attorney.
Suppose she is in a 35% marginal bracket when she inherits her share. Because inherited IRA distributions have to fit into a limited window, those withdrawals may occur during the same decade in which she is earning the most money of his career.
If $500,000 is eventually taxed at 35%, that's approximately:
$175,000 of federal income tax.
But if Mom can convert those same dollars at 24%, the tax would be:
$120,000.
That's a potential $55,000 difference.
Same $500,000.
Same family.
Same Roth conversion.
But a very different economic result depending on who eventually receives the money.
Whose Lifetime Tax Bill Are You Minimizing?
This is where Roth-conversion planning gets more interesting.
A retiree might reasonably look at their own projection and conclude:
“I'm paying 24% today, and I may only pay 22% later. Why would I convert?”
If they're likely to spend the money themselves, that may be exactly the right question.
But what if they probably won't?
If those IRA dollars are eventually headed to a child who could face a 32%, 35%, or even higher combined tax burden, voluntarily paying 24% today may look much more attractive.
Conversely, converting everything simply to leave heirs a tax-free account can also be inefficient if those heirs could have withdrawn the traditional IRA at lower rates.
The goal isn't necessarily to create the biggest Roth IRA possible.
It's to determine which dollars make sense to convert, at what tax rate, and for whose benefit.
Estate Planning Is More Than Estate Documents
Wills, trusts, and beneficiary designations matter. But transferring wealth efficiently also requires thinking about what kind of assets heirs will actually receive and the taxes that may come with them.
A $500,000 traditional IRA and a $500,000 Roth IRA may look identical on a net-worth statement.
To the person inheriting them, they may be worth very different amounts.
That's why the best Roth-conversion strategy may not be the one that minimizes a retiree's tax bill.
It may be the one that minimizes the family's.