A year ago, Congress lifted restrictions on Roth IRAs, allowing anyone to convert an IRA or 401(k) account. Previously, you could not convert to a Roth IRA if you made more than $100,000 per year.
Another change is that taxpayers can allow grandchildren to inherit $5 million (an increase from the previous limit of $3.5 million) before they will incur the tax on skipping generations. The exemption will drop to $1 million in 2013.
Many choose to give money to their grandchildren because they will get a greater return. In fact, a one-year old with a Roth account could get as much as $408 million over the course of his or her lifetime, assuming an 8% average annual return. If he or she inherits money from both grandparents, that amount could double.
A Roth IRA is the number one way to save money for one’s heirs because a Roth holder does not need to take distributions after the age of 70.5. Taxpayers are requires to pay income taxes on money converted from another account, however – as much as 35%. Expect to pay $1.7 million (at the 35% rate) for converting $5 million to a Roth IRA.
This opportunity may close before 2013; however, expert Ed Slott does not expect any retroactive changes to occur. You should advise clients to act quickly, as Slott says this situation might be as good as it can possibly get.
Clients who convert their 401(k) or IRA accounts to a Roth IRA can undo the conversion before October 15 of the next year if they so choose. The Roth IRA return for their grandchildren could be significant if clients act quickly.
Roth IRA Return - Advice For Consumers