I’m doing this right now, with Roth conversions. But I’m keeping the amount low enough that I qualify for the pension exclusion (the IRA withdrawal counts for that). It will all be excluded because I meet the income limit. So I won’t pay state tax on the gains. I’ll still pay the Federal Tax - no way around that!
I’m still considering it. Dumb Q: If my IRA is $500K, would I have to pay the income tax at once on that full amount as income?
I have moved money into that fund decades and impossible for me to figure out pre / post tax monies.
When you make an after tax contribution to your traditional IRA, you should complete form 8606. This form will keep track of your after tax contributions to your TIRA.
Prior to 2020 someone inheriting an IRA could stretch distributions from that IRA over their life time. The 10 year rule for distributions on inherited IRAs became effective in 2020.
So while your father was accumulating his IRA money he was thinking you and your sister would have your life time to take RMDs or more if needed.
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WIth a rollover to an IRA (I did a 401k to IRA), then you have to keep track of your 401k contributions. Not a big deal, but it’s not on Form 8606.
You are right.
The max tax on an inheritance not over $12M or so is 40%. I’d be happy if someone placed that burden on me… 
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There is a case where it is preferable for the heir to receive a traditional IRA rather than a Roth IRA. The situation is when, including the additional 10 year income from the inherited traditional IRA, a heir has a lower marginal tax rate than the parent.
Yeah, I suspect that 7+million might give most folks a little boost along the road of life. (I’m not a tax expert my any means, but I suspect that those with 12 million plus to leave behind would have expert advice on how to legally protect a large part of that from the 40% bite).
For most folks the traditional IRA is there not to pass on money to their heirs, it’s there to cover the emergencies that come with old age, like medical costs and long-term care, much of that expense is tax deductible.
Like you said, once you reach the point where tax consequences of given money come into play, there are lots of choices.
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But the inherited Roth doesn’t get taxed. It still must be drawn down in 10 years, but is not taxed. I’d say the inherited Roth IRA is preferable!
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So is finding $100 instead of $50 on the street.
The inherited Roth IRA was taxed at the time of conversion.
Parents with high marginal tax rates would pay more taxes at converting a traditional IRA to a Roth IRA than an heir with low marginal tax rate might pay over the 10-year conversion. This is particularly true when the amount in the IRA is not sufficient to significantly raise the marginal tax rate of the heir. In this situation the heir ends up with more dollars if the parents do not convert.
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I see nobody has mentioned the QCD which is wonderful if you wind up with too much in TIRA and you are faced with an RMD each year. Here is how you avoid paying tax on that so-called “ordinary income!”
Of course the RMD does not hit until you are 70-ish, but you are expected to draw and to confess income on your money. The Qualified Charitable Contribution allows up to $100k/year to go [directly] to qualified charitable organizations. Of course there are Rulez to follow, but done right your charitable organization pays no tax and neither do you!
For a younger but charitably inclined tax payer, one could direct a steady stream into the traditional retirement category, just to be able to give it away when the time comes. Fun!
Now you can do a one-time $50,000 Charitable Gift Annuity at age 70.5… the GCA. Make a gift, get an annuity. Nice deal.
I only have a traditional IRA, although I won’t need to take any until I am forced to - pension and social security keeps me happy. But the downside to a traditional IRA is for any beneficiaries…they have to empty the IRA in 5 years…add THAT to their normal income and they will likely be pushed into a higher tax bracket. Whereas with a Roth, it’s their money.
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Yeah, if you suffer losses in retirement and are physically unable to go back to work, and become unable to pay that monthly 15-year, 2.25% mortgage, then you will lose your house, but can still be glad that you had such a LOW interest rate. Your choice.
p1g1: If the parents convert to tax free Roth IRAs, but don’t pay the income tax out of the converted money, then the heirs wind up with MUCH more money (spread over a period of 0 to 10 years, their choice), and it is all federally tax-free!
Depends. Probably true for high earners. I’m in the same tax bracket as when I worked, so for me, the “tax break” didn’t help.
And, depending on the amount of inheritance, the person may well be in a higher tax bracket because of that – again, not so much for high earners.
If an inherited Roth fund is tax-free over a period of 10 years, then HOW does it put the recipient into a higher tax bracket? The Roth money will never be added to the income of the recipient, so cannot increase their tax bracket. It is better than any taxable inherited money that could add to their tax bracket (although gifts are usually not taxable). It seems to me that tax-free Roth money will be more valuable than taxable money to any heir, whether in a high or low tax bracket.