Q: I’m considering doing my first Roth conversion. I’ve read some mixed advice about how to pay the taxes I’ll owe. Should I use after-tax money to cover the tax, or can I just withhold taxes from the converted amount itself?
A: Ideally, I’d want you to use after-tax dollars to pay the tax bill. If you do, the full amount you’ve converted will land in your Roth IRA to grow tax-free. Using after-tax money is the optimal approach. While there is some fancy math behind this answer, it’s not necessary to go there.
Let’s be honest, though, not everyone has liquid cash on hand to cover the tax bill. If that’s the case, it’s fine to have the taxes withheld from the converted amount. Yes, it means less money will end up in your Roth IRA. But, if a conversion makes sense, don’t let the tax payment question stop you.
The key question in your Roth conversion analysis should be this: Is your current tax bracket expected to be lower than your future tax bracket? If so, a Roth conversion is wise to consider. The mechanics of the tax bill is kind of an after-thought.
Q: My husband really doesn’t want to figure out our estate planning. But I’ve seen how messy things can get from my friends who have recently had to settle their parents’ estates. It looks stressful and totally avoidable. How do I convince him to finally get our stuff in order?
A: If pure logic isn’t working, maybe painting a picture of what your kids might face will do the trick.
Let’s imagine that you die first and your husband – who never got around to doing any estate planning – ends up holding everything.
First, all your family’s assets are now in his name alone; your investment accounts, your real estate, your bank accounts and all of his personal belongings. Naturally, your kids are left piecing together a puzzle after he dies.
They’ll now need to go to probate court to get things settled. If they are smart, they’ll hire an attorney just to get started. They’ll start searching through drawers and files looking for account statements and insurance policies. And, that’s if he kept organized and updated paper files! More likely, he will have opted to get paperless statements. So, now random email notifications become the new breadcrumbs to follow and finding his login credentials becomes an issue.
Even more frustrating, if your husband didn’t think to add one of the kids to his bank account, they won’t even be able to access basic funds to pay routine bills until the probate process plays out.
Obviously, most of this is totally avoidable. Now, if helping him imagine the burden he’s leaving behind isn’t convincing, it looks like you’ll just have to do it all yourself and just ask him to sign the papers!
