Dear Liz: Since retiring, I’ve been converting a traditional pre-tax IRA to a Roth IRA. I’ve got another small pre-tax account that I could do the same with. My reason for converting is that my spouse has a very large pre-tax IRA that probably won’t be used up in our lifetimes, and I don’t want my adult children to face a large tax bomb when we both are gone. Is there any downside to including our kids as beneficiaries for that account, say 10% each? That way, if he dies before I do, some of the pre-tax account will be delivered to the kids (starting the 10-year distribution clock), and then they’d have another 10 years to withdraw (and pay taxes on) whatever remains at my death. I could foresee adding grandkids as beneficiaries as they approach adulthood. Is this a bad idea? Would it be better to continue whittling down the pre-tax accounts by converting them to Roth accounts?Answer: Last week’s column covered some of the hazards of leaving retirement accounts to minor children. If the account was owned by anyone other than a parent, distributions would need to start immediately and likely would be subject to the parent’s tax rate. Plus, handing a big wad of cash to a teenager or young adult often isn’t advisable. You can control the distributions by creating a trust, but that has its own tax implications.Including your adult children as beneficiaries isn’t as fraught with peril, but you do lose some flexibility. The surviving spouse is allowed to treat an inherited IRA as their own, which may allow them to delay distributions. Plus if the kids are in their peak earning years when they inherit, they could wind up paying taxes at high rates.Continuing with the Roth conversions may be a better way to defuse the tax bomb, particularly if your tax rate is lower than theirs and you’re willing to foot the tax bill. You’re reducing the size of the taxable IRA while creating a tax-free pot of money for your heirs. Obviously you’ll want to discuss all this with your tax pro and your estate planning attorney before proceeding.Dear Liz: I was married 37 years. I claimed Social Security at 62 because I needed the monthly income. I learned too late that if I had waited a few more years, my payment would have been much better. They did tell me that if my ex died before me, I would be entitled to have my amount increased to what he was collecting. He probably will die before me due to some serious health problems. He has since remarried to a widow who is receiving Social Security. Does she become the one who collects my ex’s monthly amount if he dies before her, which would mean she would be collecting two checks a month? And I would lose my ability to have my amount increased? I just want to be prepared for what I can expect when/if he departs before me.Answer: When people qualify for multiple benefits from Social Security, they get the largest of the amounts available to them. So if your ex’s wife is currently receiving her own or a survivor’s benefit and your ex’s benefit is bigger, she would get this larger check as her survivor’s benefit after his death. She wouldn’t be able to collect on two husbands’ earnings records at the same time.And what she gets doesn’t affect what you get. Since your marriage lasted at least 10 years, you should be eligible for a divorced survivor benefit of up to 100% of your ex’s benefit. Your survivor benefit would only be reduced if you started it before your own full retirement age.Got a question about money? You can submit it here.Liz Weston, Certified Financial Planner, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
