Roth versus Traditional retirement account contributions

Having a mortgage means that you are taking a chance that things will stay within your control. But things change and markets and the economy can change quickly.

There’s nothing quite like being debt free.

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This happened to me and my siblings when we inherited an IRA from my dad, but not as much $$ as you have, so it’s not $60k per year – much less. But it made me look at my accounts and so now I’m slowly doing Roth conversions on my 403b and IRA, so I still have tax-free retirement $$ growing and the taxes are what I can manage now.

I mentioned this in another thread about IRA/401k/403b accounts and beneficiaries. One or two people said I was being ungrateful for my inheritance !!

No…I was just pointing out an unintended consequence of a parent going tax-free for decades – the beneficiaries then must pay all of the taxes within 10 years! I question the conventional wisdom of keeping it all untaxed as long as possible.

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… :slightly_smiling_face:

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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. :slightly_smiling_face:

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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It’s 10 years now, for both Traditional and Roth. In any event, the taxation is easy enough to fix if you want to: Convert it to Roth in small enough chunks every year before you die to keep you in a reasonable tax bracket. I’ve suggested this to my parents, but it’s hard to do more than that without sounding like I feel I’m entitled to their money. If you have enough to live on with your pension and SS, this is probably a great strategy for you. You just need to watch the taxable income amounts that trigger higher taxation of SS and higher medicare premiums.

Even if you don’t do this, unless you’re a super-saver, your beneficiaries will probably have about the same amount of money after paying the tax as they would have if you had paid it during your working years. Even though the dollar amount of the taxes will be higher, so will the account balance.

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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.