Should I Convert My IRA to a Roth for My Disabled Child?

Takeaways

• If you have a child with a disability, there are several advantages to converting your traditional IRA to a Roth IRA. These benefits include tax-free withdrawals that will last over the course of your child’s lifetime.
• The sooner you complete the Roth conversion, the better.

When planning for a disabled child’s inheritance, parents and guardians face complex financial decisions. One is particularly impactful: whether to convert a traditional individual retirement account (IRA) to a Roth IRA. Understanding how tax laws, government benefits, and inheritance issues intersect is critical to making an informed decision.

Let’s explore why converting your IRA to a Roth might be a wise move for securing your disabled child’s financial future.

The End of “Stretch” IRA Rules

Before the SECURE Act of 2019, beneficiaries of inherited IRAs could take distributions over their lifetimes. By doing so, families could preserve more of their inherited wealth because the withdrawals were smaller and taxed at potentially lower rates over time.

The SECURE Act abolished stretch rules for most nonspouse beneficiaries, requiring them to fully deplete inherited IRAs within 10 years and pay taxes on distributions.

Eligible Designated Beneficiaries (EDBs) represent a significant exception to the standard rules regarding required minimum distributions (RMDs). EDBs are allowed to stretch their RMDs over their lifetime.

The criteria for EDB status generally include:

• Surviving spouse: A surviving spouse of the account holder.
• Children: Any child of the account holder who is still a minor at the time of the account holder’s death.
• Disabled individuals: Individuals determined to be disabled under the Internal Revenue Code.
• Chronically ill individuals: Beneficiaries who are considered sick chronically can also qualify.
• Other dependents: Individuals not over 10 years younger than the account holder who are dependents of EDBs.

Important note about trusts and EDB status: When a disabled individual qualifies as an EDB, this status – and the valuable lifetime stretch provision – can be preserved even when the IRA is left to a properly structured special needs trust.

To maintain EDB treatment, the trust must be established for the exclusive benefit of the disabled beneficiary and meet specific IRS requirements.

The Role of Special Needs Trusts

For disabled individuals relying on means-tested government programs like Supplemental Security Income (SSI) or Medicaid, maintaining eligibility requires careful financial planning. Income and asset limits dictate whether a person qualifies for these essential benefits.

Naming a disabled individual as the beneficiary of an IRA can jeopardize their benefits because of the income generated by required distributions. To resolve this issue, many families use a special needs trust to protect benefits while providing financial support.

The taxation landscape changes dramatically when IRAs are left to a trust. Trusts are subject to compressed income tax brackets, reaching the highest tax rate (37 percent in 2025) at a mere $15,650 of taxable income. Even a modest IRA can quickly push a trust into these punitive tax rates, significantly reducing the funds available to support the beneficiary.

In stark contrast, the income tax brackets for individuals are structured to allow much higher thresholds before reaching the same top rate. In 2025, individuals generally are not subject to the 37 percent tax rate until their taxable income exceeds $578,125 ($693,750 for those who are married and filing jointly).

Benefits of Roth IRA Conversions

Converting a traditional IRA to a Roth IRA can mitigate these tax challenges.

Here’s how.

Tax-Free Distributions

Unlike traditional IRAs, Roth IRAs are funded with post-tax dollars. This means distributions — whether to an individual or a trust — are entirely tax-free. These tax-free distributions are only available if the account has been held for at least five years and the account holder is over age 59½.

For a disabled beneficiary with a long life expectancy, this benefit magnifies over time.

Lifetime Stretch for EDBs

An EDB inheriting a Roth IRA account can stretch tax-free distributions over their lifetime. This offers a powerful advantage, allowing the funds to grow and be accessed without eroding their value through taxes.

Preservation of Government Benefits

When a Roth IRA names a special needs trust as beneficiary, the tax-free nature of the distributions provides maximum flexibility for the trustee to manage benefits eligibility.

While these distributions don’t create taxable income, the trustee must still carefully manage them since any funds distributed to the beneficiary could affect eligibility for programs such as Medicaid or SSI. Combining tax-free Roth distributions with proper trust administration allows optimal use of funds while maintaining essential government benefits.

Consult with a financial advisor or benefits specialist familiar with the specific government benefits programs to ensure that distributions do not jeopardize the beneficiary’s access to essential support.

Avoiding Compressed Trust Tax Brackets

Converting to a Roth IRA eliminates the issue of high trust tax rates. Even if the trust receives the distributions, they are not subject to income tax, preserving more funds for the disabled beneficiary’s needs.

Other sources of taxable income within the trust — like investment gains or taxable gifts — could still push it into higher tax brackets. This possibility should be accounted for when structuring the trust's financial strategy.

Timing the Roth Conversion

The timing of a Roth IRA conversion is critical. Converting early or spreading the conversion over several years can provide significant tax advantages:

• Early conversion allows for growth: The sooner you convert, the more time the Roth IRA has to grow tax-free. Given the power of compounding, even a small head start can yield substantial benefits over decades.
• Strategic tax planning: By spreading the conversion over multiple years, you can manage your tax bracket and minimize the overall tax burden. Converting just enough each year to stay within a lower tax bracket can make the process more affordable.
• Favorable conditions for conversion: If your income is temporarily lower due to retirement, a sabbatical, or another reason, it may be an ideal time to complete a conversion without entering a higher tax bracket.

Common Objections

Many families hesitate about converting a traditional IRA to a Roth IRA. Here are two common objections and why they may not hold up under scrutiny:

“What if the disabled beneficiary has little or no income?” It might seem logical to avoid a Roth conversion if the disabled individual is in a low tax bracket. However, the analysis changes due to the SECURE Act’s 10-year rule for noneligible designated beneficiaries (non-EDBs).

If you leave a Roth IRA to an heir, the funds can typically be withdrawn tax-free, provided the account was established at least five years before the account holder’s death. However, under the 10-year rule, the heir must withdraw all funds within 10 years of the account holder’s passing.

While these distributions are tax-free, the heir needs to consider the timing and amount of withdrawals because more significant or frequent distributions could push the heir into a higher tax bracket due to increased overall income.

“The cost of conversion seems too high.” Paying taxes on the conversion today can feel burdensome, but the long-term benefits for your disabled child often outweigh the upfront cost. With careful planning, the conversion can be structured to minimize the tax impact, and the tax-free growth and distributions may ultimately provide more financial security for your child.

Examples Showing the Benefits of a Roth Conversion

Imagine you have a $500,000 traditional IRA and are considering converting it to a Roth IRA. You’re in the 22 percent federal tax bracket and expect to remain there during retirement. Let’s compare the outcomes if you keep or convert the traditional IRA to a Roth IRA over five years.

Assumptions

• Annual account growth rate: 6 percent (actual investment returns can fluctuate significantly yearly)
• Conversion split equally over five years: $100,000 per year
• Federal tax rate during conversion: 22 percent
• No state income tax (adjust if applicable)
• Beneficiary: Your disabled child is inheriting via a special needs trust

Option 1: Keep the Traditional IRA

The account grows tax-deferred at an assumed annual rate of 6 percent. After 20 years, it is projected to reach $1,603,567.

Given the trust tax structure in 2025, distributions would be taxed as follows:

• First $15,650 at graduated trust tax rates
• Remaining amount at 37 percent

Assuming the trust takes distributions over the beneficiary’s lifetime:

• Total pre-tax amount: $1,603,567
• Minus 37 percent tax on the majority of distributions: $593,567 (approximate tax)
• Net amount available to trust: $1,010,000

This tax burden significantly reduces the funds available to support the beneficiary.

Option 2: Convert to Roth IRA 

To convert $500,000 to a Roth IRA over five years, you would pay taxes during the conversion at a rate of 22 percent. This results in an annual tax payment of $22,000, based on a conversion of $100,000 each year. Over the five years, the total taxes paid amount to $110,000. 

Once the money is in the Roth IRA, it can grow tax-free at an assumed annual rate of 6 percent.

A Roth IRA allows funds to grow without the drag of taxes, which can be especially impactful over decades. After 20 years, the account is projected to grow to approximately $1,603,567, with no further taxes incurred on this amount.

The beneficiary can withdraw these funds tax-free.

By converting to a Roth IRA, the trust retains approximately $593,000 more after taxes due to the tax-free structure, significantly enhancing the financial security of the disabled beneficiary.

If the annual tax payment is deducted from the amount converted, the final balance in the Roth IRA after 20 years of growth would be approximately $1,116,975. While lower, this is still $106,975 more than the amount remaining with a traditional IRA.

Planning for the Future

Every family’s situation is unique, and there’s no one-size-fits-all answer to inheritance planning. However, for those with disabled children, converting a traditional IRA to a Roth IRA offers a compelling opportunity to optimize financial security while preserving eligibility for government benefits.

The key is to start early, plan strategically, and work with professionals who understand the intricacies of tax law, special needs trusts, and government benefits. By taking a proactive approach, you can ensure your child’s inheritance supports them throughout their lifetime.

DISCLAIMER: Jeff Vistica is the managing principal of Vistica Wealth Advisors based in Carlsbad, CA. He is a CERTIFIED FINANCIAL PLANNER™, a Chartered Special Needs Consultant® a Chartered Financial Consultant® and an Accredited Investment Fiduciary®. He earned an Executive Financial Planner Advanced Certificate from San Diego State University and his bachelor’s degree from Loyola Marymount University.

Vistica Wealth Advisors is an SEC registered investment advisory firm. Information was compiled from third-party sources believed to be reliable, however Vistica Wealth Advisors cannot guarantee the accuracy of that information. Hyperlinks to this third-party informational content and websites are provided solely for reader convenience.

Information provided is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Prior to implementing any strategy, everyone is advised to consult with the appropriately licensed professionals to assess your individual situations and needs.