Dear Rick:

I am 70 years old, a widow and have just retired. Between my Social Security, my pension and my husband’s pension, I earn more than when I was working. I wanted to start gifting money to my children, but they said they don’t need it and that I should keep my money for myself. Both my children do very well and I know they don’t need my money, but I figure they’ll get it eventually so why not give it to them now. I would still like to do something for them, but I don’t know what. Is there any way I can put money in their name without them knowing about it? My second question is, do you know anything else I can do with my money that would help them? You should know I have about $150,000 in CDs and another $300,000 in IRAs. I am planning to take my minimum required distribution later this year.

Thank you.

Elaine 

Dear Elaine:
First of all, congratulations for having such wonderful children. In too many situations, and I see this all the time, children can be very greedy when it comes to their parents’ money. It’s nice to hear that your kids are the exact opposite.

With regard to your first question, there is really nothing you can do to put assets in your children’s name without them knowing. After all, with most investments there will be 1099s issued or there will be legal documents that have to be signed. Therefore, there’s nothing you can do on that front. However, I do have an idea that I think will work for you.

Since you said that your two children are going to be the beneficiaries of your estate, something that you can do for them today which will help them in the future is to consider converting some of your traditional IRA into a Roth IRA. The benefit to your children is that when they inherit the Roth IRA they would not have to pay any income tax on that money. When someone inherits a traditional IRA, they do have to pay taxes on the money. Therefore, if you did a Roth conversion and moved all or a portion of your IRA money into a Roth IRA, it would significantly lower their income taxes once they inherit the money. In addition, a conversion could also be a good financial move for you as well.

In doing a Roth conversion you do not have to convert your entire IRA at once, and in your situation I would not recommend that. Remember, when you do a Roth conversion you do have to pay tax on the money you are converting. Therefore, if you converted your entire IRA this year there would be substantial taxes that you would have to pay. In addition, when you convert such a large amount, your tax bracket would be significantly higher and it could adversely affect the tax on your Social Security benefits, and can also negatively affect your Medicare B premiums. Therefore, it makes sense to do a partial Roth conversion, year by year, converting enough each year to keep you in the same tax bracket.

My general rules to do a Roth conversion are 1) you must have the money to pay the tax without touching the money that you’re converting; 2) by converting it won’t throw you into a higher tax bracket; and 3) you can leave the money there for at least five to seven years. If you meet those three criteria, it makes sense to consider a Roth IRA conversion.

One last note, people tend to think that you can only do a Roth conversion near the end of the year which is not the case. In fact, the sooner you do a Roth conversion the better it is because the sooner you convert the longer your money would have the opportunity to grow tax free versus tax deferred.

Good luck!

Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.
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