Financial Q&A: Tax strategies for passing assets on to children
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Q: I have a traditional IRA and a variable annuity with a maturity date of April 2009. In discussing how to pass assets to my children, a financial adviser suggests that I take a full distribution from my IRA and take everything out of my variable annuity and invest it all in conservative equities. He says that because I'm in a lower tax bracket than my children, they would pay less in taxes than I would, and more of my assets would be passed on to them. Is this true?
I.L., via e-mail
A: If you pursue a one-time distribution of these two assets, you will likely be vaulted into a much higher tax bracket – one that is probably higher than your kids, says Joseph Montanaro, a certified financial planner with USAA in San Antonio, Texas.
If the goal is to provide your kids with a financial advantage, Mr. Montanaro says you might consider these other options:
•Convert your traditional IRA to a Roth IRA if you're eligible. You'll pay the taxes now, but your children won't pay income taxes on a Roth IRA that they inherit.
•Spread the regular distributions or conversions to a Roth IRA over several years, allowing you to potentially take advantage of favorable tax treatment (assuming tax laws don't change) and avoid a huge tax hit.