I was referring to taxes on the traditional IRA (inherited), not the Roth.
But the Roth might be taxable at the state level, depending on the state.
Roth is definitely better for heirs.
I assume youâre talking about a regular IRA, not inherited, not Roth, not 401k rollovers?
If youâre talking about an inherited IRA, the original ownerâs contributions donât matter. The heir pays tax on all of it, over 10 years of withdrawing.
All of your IRA contributions should be listed on your tax forms each year.
Also, you receive a Form 5298 each year you contribute to an IRA (it may not include a previous-year contribution made at tax time though).
Digging up that information is work, and youâd have to have your tax paperwork.
Or â if you have end-of-year statements from your IRA fund, those will list your contributions, too.
I went through this with my IRA funds, which Iâve moved, rolled over, etc over the years. Luckily I had all of my statements and tax forms. Now I just keep it up-to-date as needed.
If the heir is in a lower tax bracket than the heir ends up with more money if the original owner did not convert to a Roth IRA. My understanding of the numbers is given in this example.
Consider this imaginary situation with, for simplicity, made up tax brackets and with no change in the price of the assets over a short time period. A Parent in the 30% bracket has $100,000 in a traditional IRA and $30,000 cash in a brokerage account. The accounts will be inherited by Child in the 10% tax bracket. On day A Parent converts to a Roth IRA using the $30,000 brokerage money to pay the taxes. Parent dies on day B with $100,000 in a Roth IRA and 0 in the brokerage. The money is inherited by the Child who immediately uses the remaining $100,000 proceeds for a downpayment on a house.
Now consider if the Parent had not converted to a Roth IRA. On day B when the Parent dies the Child gets $100,000 from the traditional IRA and $30,000 from the brokerage account. Child immediately pays $10,000 tax from the brokerage account for the tax on the inherited traditional IRA leaving Child with $120,000 for a downpayment on the house: $20,000 form the brokerage and $100,000 from the IRA. Due to a lower tax bracket, Child ends up with $20,000 more if conversion is not done.
Comments welcome 
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Looking forward to comments as this is my current dilemma.
With an additional $100,000 of taxable income from an inherited traditional IRA, the child is likely no longer in the 10% bracket. The heir(s) could spread it out over 10 years and possibly reduce their taxes, unless they need that down payment now.
Consider the state(s) the parent and children live in, too.
Whatever your plan is, let your heirs know.
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Thanks @lisa5678 for your comments. In trying to make a point, I got lost in the trees and missed the additional income forest. My example would have been cleaner if I used the starting point of $10,000 in a traditional IRA and $3,000 in the taxable account.
The heir inherits $100k IRA will not be in the 10% bracket anymore if they âimmediatelyâ pay the taxes and take the $$ for a downpayment. The 10% bracket is about $11k. Adding $100k of income would put them in the 24% bracket (if single).
The parent might not use the brokerage $$ to pay the taxes, as removing that money will likely trigger more tax events (unless itâs all in tax-exempt bonds?). They might make quarterly payments from their current income instead, and not touch the brokerage.
If the parent is retired, they are likely not in the 30% bracket (retirement income would be around $180k-230k if single, $360k-462k if married). If thatâs a lower income than when they worked, then they should have had more than $100k in a retirement account, just sayinâ !
Also, the 30% tax bracket is a marginal rate, only on the income above the income limits, not on the entire amount.
Anyway, as Iâve posted before, I went through this when my dad passed, inheriting some $$ in IRA, Roth, and regular brokerage accounts. Since it was split among siblings, it wasnât a huge amount, but enough that we have to watch how much is withdrawn each year. The Roth is so much easier, not being taxed.
I guess the philosophy is: does the parent want to avoid taxes and have their heirs pay it, or can they start withdrawing and paying some of the taxes back that they benefitted from instead of passing the responsibility on.
For myself, I have decided to slowly convert my pre-tax retirement accounts over to Roth. My state has an income exclusion so if I stay within the income limit, I wonât owe state tax on my Roth conversions. Iâll still owe federal but again, I watch so I donât go into the next bracket. I did not make megabucks when I worked, so the conventional wisdom of taking the tax break when I was working because Iâd be in a lower tax bracket retired, was just plain wrong. That applies to high earners, not regular folks like me.
I made the decision that itâs my tax to pay and I donât want my heirs to have to pay the tax that I did not. I feel like thatâs a small gift I can pass on, though they may never know about it. Thatâs my personal decision.
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My plan is to convert to Roth until RMD / IRMAA are no longer problems, live off of my Roths, and then my kids get my taxable assets.
The taxable assets will be stock-heavy, so they get a step-up in basis anyway⌠I donât need to give up the tax-free nature of Roth while Iâm alive to pass it along to them, because they literally donât need it. With step-up in basis, theyâll get the taxable assets tax-free anyway! And they donât have to sell within 10 years.