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To convert or not to convert

Question: I have IRAs and am past age 65 and heading quickly towards 70. I understand that when I die, the remaining balance for my beneficiaries will have to be made based on some magic formula. I do not intend to use most of my IRAs myself. Would converting some of these funds (as much as I can afford to pay taxes on) be a good move for my beneficiaries? I couldn't figure out how to use the Roth conversion calculator for my situation. Marilyn, Raleigh, NC

Answer: You're right that a major attraction of the Roth-IRA is that there is no required minimum distribution starting at age 70 ½. That means if you keep going and you don't need the money for your old age the money continues to compound for your heirs. Indeed, for a small subset of the population--those who don't need to use their IRA money in retirement and have the extra savings to pay the tax bill at conversion and want their children to inherit the savings--the Roth conversion option is terrific.

But for everyone else there are many trade-offs to consider first. You've saved the money. Are you sure you don't want to spend it on yourself? The numbers on conversion have to make sense and I'm concerned that conversion from a traditional IRA to a Roth is being way oversold. Even though the Roth is a better savings vehicle from an estate point of view the rules on inheritance are tricky with various twists and unexpected turns.

The best Roth conversion calculator I've seen is at www.analyzenow.com. It's a (mostly) free program that compares what happen if you convert an IRA to a Roth to what would happen if you don't. It has clear descriptions of what is needed for entries as well as warnings that come up when you may be violating one of the rules of an IRA or Roth.

Its charts compare the results of an IRA with a Roth using your assumptions for taxes, returns and inflation. Unlike most programs, you can also make some important shifts over time. For instance, you might expect tax rates to increase in future years or perhaps decrease if you have all fixed income investments that degrade with inflation.

That said, in a situation like yours it can pay big dividends to visit with a fee-only certified financial planner. Since it looks like your children are possibly going to reap some benefit from your IRA decisions maybe they could fund the sessions.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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