Tuesday, September 13, 2016
Courtyard Marriott / Monroeville
3962 Wm Penn Highway
Monroeville, PA 15146
Between Sheetz and Eat ‘n Park
Tuesday, September 13, 2016
Holiday Inn Express
6552 Route 22
Delmont, PA 15626
Behind Lamplighter Restaurant on Rt. 22
Wednesday, September 14, 2016
TownePlace Suites / Pittsburgh
2785 Freeport Road
Pittsburgh, PA 15238
Just off of Exit 48 of PA Turnpike
Wednesday, September 14, 2016
The Estate Planning Centers
3824 Northern Pike, Suite 801B
One Monroeville Center
Monroeville, PA 15146
Just west of Red Lobster on Rt. 22
Saturday, September 17, 2016
Holiday Inn Express
6552 Route 22
Delmont, PA 15626
Behind Lamplighter Restaurant

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Roth IRAs Can Improve Your Estate Planning

Would a Roth Conversion Improve Your Family’s Security?
When people think about Traditional IRAs compared to Roth IRAs, they usually focus on the difference in current versus future income tax treatment, and overlook how these accounts are treated differently in the context of their estate plan for their family.  This article explores some of the differences, with the goal of initiating a thought process about which approach is best for your own family.
Most IRA accounts are Traditional IRAs.  The contributions you make to the accounts (or rollover from another plan) are not taxed initially (i.e. the contribution is tax-deductible on your current income tax return) when the money goes in, and even the growth is tax-deferred.  You must, however, begin taking distributions at age 70 ½, and those distributions are taxed as income at that time. The amount of that distribution is based on your age each year, and as you get older, those required minimum distributions (RMDs) get much larger.
Roth IRAs are funded with after-tax dollars (i.e. you don’t get a current tax deduction for your contribution), but thereafter essentially grow tax-free. When you take distributions from the Roth IRA, those distributions are not taxed in almost all circumstances, includingi:
If you are over 59 ½;
  • If you are disabled;
  • If you are buying a first home;
  • If you are paying medical expenses or insurance premiums;
  • If you are paying higher education expenses for family; or
  • If payments are to the beneficiary of a Roth IRA owner
The estate planning magic of the Roth IRA is the fact that you aren’t required to take those annual RMDs from a Roth account, and instead the money can continue to sit and grow.  This can make a Roth a great method to build an inheritance for your family’s future.  While any beneficiary other than your spouse will have to take RMDs after they inherit this Roth IRA, the rate they need to withdraw the funds is much lower, due to their typically longer life expectancy. 
When our beneficiaries take distributions from a Roth IRA following our death, those amounts are not subject to income tax. This is an important distinction from the Traditional IRA, as its distributions are taxable income to our beneficiaries.  
Pretend for a minute that you don’t anticipate requiring some or all of your IRA to live comfortably in retirement, and that the account will ultimately go to your children after the death of you (and your spouse, if you’re married).  With a Traditional IRA, you will have to take annual distributions from the account, pay the income tax, and you no longer get tax-deferred growth of the amounts distributed. The value of the account, including the built-in income tax liability on the account, will be subject to Pennsylvania Inheritance Tax and may be subject to Federal Estate Tax.  As your beneficiaries thereafter withdraw money from the Traditional IRA they inherit, it will be taxed as income based on their then-current marginal tax rates.  
With a Roth IRA, however, you don’t have to take those minimum distributions.  The account can continue to grow undisturbed and without income taxes.  While the Roth IRA will be subject to the same death tax exposure before it passes to your beneficiaries, this time your family is not paying death taxes on the income tax liability in the account (i.e. not paying a tax on a tax), because you used after-income-tax money to create the account in the first place.  
A Roth IRA may come from money you contribute annuallyii, but it also can be funded with money you convert from a traditional retirement plan, such as a Traditional IRA or 401k.  In 2011 and 2012, the income restrictions against converting assets to a Roth IRA have been lifted, and the IRS will let you spread any tax liabilities from the conversion over 2011 and 2012, to permit you to avoid having the conversion process from pushing you into an uncomfortably high tax bracket. While we are hopeful that the income restrictions and two-year tax spread will be continued after 2012, no one is certain at this time. As such, if you are considering a Roth conversion, you should get the process underway in time to take advantage of 2011’s relaxed rules.
This all may sound rather muddled and confusing, because it can be.  In a nutshell, by creating or converting to a Roth IRA rather than a Traditional IRA, you trade paying income taxes now (at current rates, which are historically rather low) to save your family from paying income taxes following your death (at future income tax rates). Further, because you don’t have to take any RMDs from the Roth IRA during your entire life if you don’t want to, that account can continue to build on itself. Finally, your family isn’t paying death taxes on the amount of income tax liability which is built into the Traditional IRA, but instead only on the amount of the Roth that they will actually get to use and enjoy.
Deciding on whether or not to convert traditional retirement assets to a Roth IRA can be a complex one. Instead of trying to struggle through those questions, let us discuss the estate planning and tax implications with you. If you would like to run some scenarios with calculations under varying circumstances, we’d be happy to incorporate advice from experienced financial planning professionals, so you can make decisions based on data specific to your circumstances.  The question of whether to convert or not, however, is too important to ignore using excuses like being busy or confused. The answers are available; you just need to ask.
iThis is a simplified version of the requirements. Publication 970 from the IRS sets forth the details. This article illuminates general concepts, and is not intended to represent any particular person’s circumstances.  This article is not intended as tax advice, and we remind you that we would need to meet to discuss your personal circumstances before any recommendation could be made about what is best for your situation.
iiThere are income restrictions on annual Roth contributions, which are different than Roth conversions. For 2011, singles can make a full annual contribution as long as their income is below $107, 000. A reduced phase-out occurs between $107,000 and $122,000 in annual income, and if you're single and you earn more than $122,000 you're ineligible to contribute to a Roth in 2011, though you can do a conversion. If you're married filing jointly, you can make a full contribution if you earn less than $169,000 in 2011, with contribution eligibility (but not conversion) totally phased out if you earn more than $179,000.