Withdrawls at Age 70.5

[Guest PD]

When I turn 70.5 and start taking mandatory annual withdrawls from my traditional IRA, can I pay the tax, then convert the remaining part of the withdrawl to a Roth IRA each year? Maybe it ultimately won't matter because the "outside" money will probably never be taxed anyway - my heirs will inherit it with a stepped up basis, tax free. Is this the case?

[Guest ezollars]

You cannot roll mandatory minimum distributions into a Roth IRA account for the simple reason that can't roll them to a traditional account either. The regulations provide that you must first take your minimum distributions *before* rolling over amounts into the Roth IRA account in any year.

So, for example, if you had $100,000 in your regular IRA and had a required distribution of $10,000 for the year in question, you could take a distribution of $10,000 and then convert the *remaining* $90,000 to a Roth IRA. But you could not put any of the $10,000 into the Roth IRA.

As for outside money--if you invest it in nondividend paying stocks and hold it till death, there would be no income tax at that point in time. However, any future appreciation would be subject to tax.

Since the income tax would have been "squeezed" out of your estate, the primary issue is to decide whether your heirs would be most likely to spend their inheritance immediately (in which case the outside funds are effectively "equivalent" to the Roth) or whether they would leave the funds in the Roth and be able to take advantage of a continuing shelter of the funds.

Additionally, the Roth would provide some "protection" should you need to access the funds after significant post-conversion appreciation.