In essence, a Roth IRA conversion
last year would have moved a client’s
investment assets from highly taxed to
potentially untaxed territory (all withdrawals are tax-free after the owner
has had the Roth IRA for more than
five years and is at least age 59½).
Of course, a full or partial Roth IRA
conversion may not be suitable for
every client. But it is a conversation
worth having with high-income clients, even if rates have just gone up,
so clients are aware of their options
and the tax consequences.
ESTA TES AND TRUSTS
The 3.8% surtax affects trusts and
estates as well as individual taxpayers. The calculation is a bit different,
trust income in excess of about
will be taxed at the highest
gross income far below $250,000
or even $200,000.
EXAMPLE: TRUST INCOME
A woman died last year and left her
$1million IRA to a trust. Her daugh-
ter is the trust beneficiary. Assume
the trust qualifies as a see-through
trust and that required minimum dis-
and such income may be taxed at
extremely high rates.
EXAMPLE: bIg DEDUCTIONS
What if your client has large itemized
deductions, so large that they reduce
The 3.8% surtax affects trusts and estates as well as individual
taxpayers, although the calculation is a bit different.
though. For estates and trusts, the
3.8% surtax applies to the lesser of
( 1) any undistributed net investment
income or ( 2) the amount of modified
adjusted gross income subject to the
top tax rate for estates and trusts.
Trust income in excess of about
$12,000 will be taxed at the highest
ordinary rate, which was scheduled
to be 39.6% for this year. Undistributed net investment income is net
investment income (interest and
dividends) that is earned by the trust
in a given year and not passed out to
trust beneficiaries within the same
Some clients want to leave IRAs
to a trust, perhaps to prevent the
beneficiaries from squandering or
mishandling this inheritance. Therefore, the 3.8% surtax could affect
some clients with modified adjusted
tributions are to be taken by the trust
over the daughter’s life expectancy.
If the daughter is 57 in 2013, her life
expectancy is 27. 9 years. Therefore,
the trustee must withdraw at least
1/27.9 of the $1 million inherited IRA
balance in 2013, or $35,842.
Now imagine that the trustee
has the discretion to retain any or
all of the inherited IRA distribution
in the trust and dole out funds to
the daughter as needed. In this scenario, since the required minimum
distribution alone, if undistributed,
would push the trust income over
the trust modified adjusted gross
income threshold, all of the trust’s
net investment income will be subject to the 3.8% surtax.
As time goes by and money in the
trust accumulates, more investment
income is likely to be generated,
taxable income substantially? Will that
reduce his modified adjusted gross
income for the 3.8% surtax?
Ed Slott, a CPA in Rockville Centre,
N. Y., is a Financial Planning
contributing writer and an IRA distribution
expert, professional speaker and author of several books on IRAs.