A Couple in Their 80s Wants to Do Roth Conversi... | Cayman Journal

Glen and Harriett Hager, both well into their 80s, represent a growing demographic grappling with complex financial decisions late in life. Having meticulously crafted their estate plan over the years, the Hagers are now turning their attention to an intriguing, albeit counterintuitive, strategy: Roth conversions. Their primary motivation isn't maximizing decades of tax-free growth, as it typically is for younger investors, but rather securing their financial future in the face of potential incapacitation. The question isn't just if they can do it, but if they should.

For most financial planners, a Roth conversion is a strategy best employed in one's working years, ideally when future income is expected to be higher, or during temporary dips in taxable income. The premise is simple: pay taxes now on traditional IRA or 401(k) assets, and in return, all future qualified withdrawals and growth are entirely tax-free. For Glen and Harriett, however, the calculus is distinctly different. Their focus is less on personal future tax burdens and more on simplifying their financial landscape for their heirs and, critically, for themselves should one or both become unable to manage their affairs.

The Incapacity Imperative: Why Roth Now?

The Hagers' proactive approach stems from a desire to mitigate the administrative and tax complexities that can arise when an individual, or a couple, faces cognitive or physical decline. Here’s why a Roth conversion might appeal to them:

Eliminating Future RMDs: At their age, Glen and Harriett are subject to Required Minimum Distributions (RMDs) from their traditional IRAs annually. These distributions are taxable, adding to their taxable income year after year. Should one or both become incapacitated, managing these RMDs – ensuring they're calculated correctly, taken on time, and accurately reported – can become a significant burden for their appointed power of attorney or trustee. A Roth IRA, by contrast, has no RMDs for the original owner, dramatically simplifying future financial management.
Tax-Free Inheritance for Heirs: This is perhaps the most compelling long-term benefit. While the Hagers would pay taxes on the converted amount now, their beneficiaries would inherit the Roth IRA completely tax-free. With the SECURE Act's 10-year rule for most non-spouse beneficiaries, traditional IRAs can become a significant tax headache for heirs, forcing them to draw down and pay taxes on the entire inherited sum within a decade. A Roth inheritance, however, bypasses this, providing a clean, tax-free windfall. This aligns perfectly with their estate planning goals.
Predictable Tax Planning: By converting now, the Hagers effectively lock in their tax rate on the converted assets. This removes the uncertainty of future tax legislation or changes in their own income that could push them into higher brackets. For a couple in their 80s, the predictability offered by a Roth account can be invaluable for peace of mind.

The "Should They?" Dichotomy: Weighing the Downsides

Despite the compelling reasons, the decision to undertake Roth conversions at 80 is far from a slam dunk. The immediate and significant downside is the tax bill.

Immediate Tax Hit: Converting a substantial portion of a traditional IRA means adding that amount to their taxable income for the year. This could push them into a higher tax bracket, increase their Medicare Part B and D premiums (known as IRMAA), and potentially impact other income-dependent benefits. Do they have sufficient liquid assets outside their retirement accounts to cover this tax liability without dipping into necessary funds?
Lost Liquidity: The money used to pay the conversion tax is gone. For a couple in their 80s, liquidity is paramount for unforeseen medical expenses, long-term care, or other late-life needs. Sacrificing a significant chunk of liquid cash for a tax strategy requires careful consideration of their overall financial resilience.
Shortened Time Horizon: While the Hagers are focused on incapacity and heirs, the fundamental benefit of Roth IRAs is long-term, tax-free growth. At 80, the time horizon for that growth is naturally shorter. Is the benefit of paying taxes now worth the loss of immediate liquidity and the potential for those funds to be deployed elsewhere, perhaps earning a higher return or simply providing a larger emergency cushion?
Future Tax Brackets: While converting locks in the current tax rate, there's always a possibility that their future taxable income might drop significantly (e.g., if one spouse passes away, reducing Social Security or pension income), placing them in an even lower tax bracket. In such a scenario, paying taxes now could prove to be a more expensive proposition than deferring.

A Personalized Path Forward

For Glen and Harriett Hager, the decision hinges on a detailed analysis of their specific circumstances. An experienced financial advisor, working in tandem with a tax professional, would need to evaluate:

Their current and projected taxable income and marginal tax bracket.
The size of their traditional IRA holdings they intend to convert.
Their existing liquidity and cash flow.
Their overall health and estimated longevity.
The tax situation of their beneficiaries.
The specifics of their existing estate plan, including any trusts or advanced directives.

Ultimately, the Hagers' desire to simplify their financial affairs for the future, especially in the context of potential incapacity, is a noble and practical goal. While Roth conversions at their age are unconventional, they offer a powerful tool for streamlining tax obligations for heirs and reducing administrative burdens during life's later stages. It's a strategic trade-off: paying taxes now for substantial future simplicity and tax efficiency. For Glen and Harriett, the question isn't just about maximizing wealth, but optimizing peace of mind and easing the path for those who will eventually manage their legacy.