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Liz Weston

Q&A: Roth IRA conversions can benefit your heirs—but at a cost

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Dear Liz: I have been reading the questions about converting an IRA to a Roth and want to know how it might apply to my situation. I have been getting my required minimum distributions for a while, and I have been paying the surcharges on Medicare because of my higher income. Would it still be worth it to convert to a Roth? My children have very good income so inheriting my IRA and paying the taxes on that will probably be a burden. Thoughts?

Answer: A Roth IRA is a wonderful asset to inherit. Beneficiaries typically must empty the account within 10 years, but the withdrawals are entirely tax free.

That generosity comes at a cost, of course. You’d have to pay the taxes on any amounts you convert from your IRA, and the conversions could trigger even higher Medicare premiums. A tax pro can guide you about whether conversions make sense as well as how to do them: gradually over time or all at once.

Got a question about money? You can submit it here.

Q&A: Why marriage can reduce taxes on a home sale

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Dear Liz: We are a heterosexual couple who are registered domestic partners in California. We have owned our primary residence for decades. Obviously, its value has increased and is well past the $500,000 home sales exemption limit for couples.

When one of us passes away, how is the basis and the appreciation of the residence calculated for federal and state taxes? Does the step-up basis come into play for both federal and state taxes when calculating capital gains? We do not have any children and are leaving the bulk of our estate to charity.

Answer: California offers the valuable double step-up in tax basis to registered domestic partners, but the federal government does not.

In most states, one half of a couple’s jointly owned property gets a new value for tax purposes when the first partner dies. This step-up in value eliminates capital gains taxes on any appreciation that happened during the deceased partner’s ownership.

In community property states, however, both halves of jointly owned property can get the step-up in value when the first spouse dies. California generally treats registered domestic partners the same as married couples, but IRS Revenue Ruling 2013-17 and Regulation 301.7701-18(c) specify that “marriage” and “spouse” do not include registered domestic partnerships for federal tax purposes, according to Wolters Kluwer Tax & Accounting.

Let’s say you bought the house for $300,000 in the 1980s, invested $100,000 in upgrades over the years and it’s worth $2 million today. The current tax basis would be $400,000 (the sales price plus the upgrades). That’s the amount the two of you would subtract from the sales price to determine the potentially taxable capital gain. You could exempt $500,000 of the home sale proceeds ($250,000 per owner) since you’ve owned and lived in the property at least two of the past five years. That leaves a taxable gain of $1.1 million.

If one of you died tomorrow, only half of the property would get stepped up to the current market value for federal tax purposes while the other half would retain its $200,000 basis for a total basis of $1.2 million. For state tax purposes, both halves would get the step-up so the new tax basis for state taxes would be $2 million.

Something else to consider: a federal law allows the full $500,000 exclusion for surviving spouses if they sell the home within two years of the death. That provision is not extended to registered domestic partners.

As you can see, a marriage certificate could make an enormous difference if the survivor wanted or needed to sell the home after the first death.

Marriage confers a number of other benefits under federal law. A spouse can receive Social Security spousal and survivor benefits, for example, but registered domestic partners aren’t eligible for benefits on a partner’s earnings record. Spouses also have special rights with IRAs and employer retirement plans, such as being able to treat an inherited IRA as their own. Non-spouse beneficiaries, including domestic partners, generally must empty the accounts within 10 years.

Your mileage may vary, but the benefits are numerous and valuable enough to make marriage worthwhile in many cases. Please talk to your tax pro and estate planning attorney for individualized advice.

Q&A: Can I open a Roth IRA for my minor grandchildren?

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Dear Liz: Where can I open a Roth IRA for my minor grandchildren?

Answer: Fidelity, Charles Schwab and Vanguard are among the large brokerages that offer custodial IRAs with no account minimums or fees.

Getting your grandkids started with saving for retirement is a great idea, but they’ll need to be earning their own money before you can contribute to an IRA or a Roth IRA for them. You can match whatever taxable income they receive from a job or self-employment up to the annual contribution limit, which is $7,500 in 2026. You’ll want to keep copies of the tax returns showing their income in case you’re ever audited.

If the minor doesn’t have taxable income, you could consider contributing to a Trump account. That requires filling out IRS Form 4547, but only certain people in a certain order are allowed to fill out the form. For example, if the children have a legal guardian, that person fills out the form. If there’s no legal guardian but the child has a parent, the parent fills out the form. If there is no parent, an adult sibling can fill out the form. Only if there is no legal guardian, parent, or adult sibling is a grandparent allowed to fill out the form. Once the account is established, up to $5,000 per year per child can be contributed.

That’s only the start of the many complicated requirements surrounding these accounts, so seek a tax pro’s advice before proceeding.

Keep in mind that with Trump accounts, the money is turned over to the child at 18, while custodial accounts must be turned over by the age of majority (typically either age 18 or 21, depending on the state). If you want to maintain control of the money for longer, consider funding a 529 college savings account. The contribution limits are much higher, the money is tax-free when used for qualified education expenses, and up to $35,000 can eventually be rolled over to a Roth IRA.

Q&A: Social Security disability benefit doesn’t increase at retirement age

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Dear Liz: If someone is currently receiving Social Security disability payments, does the monthly dollar benefit change when they reach age 62 or at full retirement age?

Answer: Social Security disability payments convert to a retirement benefit when the recipient reaches their full retirement age, which is currently 67. The dollar amount doesn’t change, although recipients continue to get cost-of-living adjustments.

Q&A: Can insurers require you to buy a membership?

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Dear Liz: I have my homeowners and auto insurance with the auto club. For the past few years, I have called them about their $59 yearly membership fee. I advised them that I did not need any of their services, as my last three new cars have their own roadside service. I was shocked to find out that if I do not pay the $59 membership fee, my home and auto insurance will be canceled.

How is this legal, and why must I buy something I do not need to be covered for home and auto insurance? Also, I cannot pay my home and auto insurance by credit card so I can get my points. Again, is this legal?

Answer: Yes and yes.

The answer to your first question is embedded in the phrase “membership fee.” The regional auto clubs that make up the American Automobile Assn. are mutual-benefit membership organizations created to provide products and services directly to their (wait for it) members.

In addition to roadside assistance and insurance, clubs typically offer travel planning, DMV services such as vehicle registration renewals, proprietary financial products and discounts on hotels, theme parks and movie tickets.

If you don’t want any of those things, then you don’t have to be a member. If you want access to your club’s insurance coverage, though, you’ll need to pony up.

As to your second question, businesses and organizations in the U.S. are typically free to determine which payment methods they’ll accept. If they don’t want to take credit cards, they don’t have to.

Q&A: How can I withdraw money from an IRA without paying taxes?

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Dear Liz: I’ve been retired for 17 years due to illness. My wife has passed away. I know nothing about finances. She did it all. I have an IRA with my wife. I want to withdraw from it but not be penalized on taxes. I know there is a way, but I don’t know the proper way.

Answer: Please find a good tax professional to help you. Retirement accounts have a lot of rules and some stiff penalties if you get things wrong. Even people who know a lot about finances can get confused and make costly mistakes. Since you’re starting from zero, you’ll definitely want expert advice to guide you.

Let’s start with the fact that withdrawals from traditional retirement accounts are typically taxable. That’s only fair, since people usually get a tax break for putting money into the account and the balances grow tax-deferred for many years. At some point, Uncle Sam wants his due. Withdrawals from IRAs usually must start by a certain age (currently 73) and are added to your taxable income. You can face penalties if you don’t make these withdrawals on time. You’ll also face penalties if you try to tap retirement accounts too early (typically before age 59½).

Roth IRAs are the exception to these rules. You don’t get a tax break on contributions to a Roth, but withdrawals in retirement are typically tax free and there’s no requirement to make withdrawals by a certain age. Also, you can withdraw the money you contributed directly to a Roth IRA at any time without facing taxes or penalties.

You mentioned that you have this account “with” your late wife, but you can’t own an IRA with another person. If you’ve inherited your wife’s IRA, the rules about when you have to start taking withdrawals can vary. Again, you’ll want to consult a tax pro who can give you individualized guidance.