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ER - Roth, leaving $ for kids
Old 06-23-2013, 08:30 AM   #1
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ER - Roth, leaving $ for kids

ER 4+ years now. Living off of taxable investment income.
Traditional IRA (includes 401k rollover) has > $1m in it.

Wife and I are planning on leaving some $ to the kids when it's our time to go.
That's a long time off.

My gut tells me that I'm making a mistake by not having a Roth and putting
money in it every year. Let it grow 20+ years. Leave this to the kids.

I'm thinking that the traditional IRA will be taxed twice and the kids would
have more if money was in a Roth.

I did open up a Roth for them a few years ago to get them started with their
retirement planning. Push them to add to it every year.

Is my thinking wrong?
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Old 06-23-2013, 11:54 AM   #2
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see thing similarly. I plan to spend down our traditional IRAs but leave our two Roths to our two boys. Maybe not ideal for our consumption purposes (using taxable & Roths is commonly adviced) but we figure the Roths are a good tax free inheritance for our kids and the Roths are an emergency fund if we need them for some reason.
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Old 06-23-2013, 11:58 AM   #3
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I've been doing some Roth conversions the past few years with the intention that they go to my son and his family when we croak. Having him inherit Roths from us seems like a great way to help him to FIRE.
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Old 06-23-2013, 12:45 PM   #4
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Assuming 1) you are leaving you entire estate to your children, and 2) taxes for Roth are paid with money outside the IRA, the difference in after-tax value for a beneficiary between Roth and tIRA is small. The difference comes from 2 sources: 1) tax rate at time money is placed in Roth vs. tax rate a time of withdrawal, and 2) estate taxes.

If the beneficiaries are adult children during their prime earning years, in a tax bracket higher than yours, they will likely pay a high rate of tax on the required withdrawals. If your tax rate is lower, converting to Roth while you are alive will yield some tax savings for them.

If your beneficiaries are young children, their tax rate (for now) is likely to be lower than yours, so leaving the funds in a tIRA can be an option. It does, however, raise a different issue: the possible consequences of handing young children what could be a large amount of required annual withdrawals that may warp their perspective of money and the need to save.

If your estate is large enough to be subject to estate tax (federal or state) then converting to Roth while you are alive means you reduce the value of your taxable estate by the amount of taxes you pay on the conversion to Roth. Thus fewer dollars are around to be hit with an estate tax.

As you may know, a beneficiary cannot convert a tIRA to a Roth, so if you decide Roth is the way to go, it needs to be done while you are alive.
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Old 06-23-2013, 05:01 PM   #5
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Quote:
Originally Posted by 1st Tee View Post
I'm thinking that the traditional IRA will be taxed twice -----------
Why do you think that? The TIRA gets a tax deduction at contribution and is taxed when you (or kids) withdraw. A Roth gets taxed at contribution (your wages are). A Roth could very well be better under the right circumstances but not all.........perhaps you convert later when you retire in a low bracket rather than pay taxes now, etc. This is a quantitative, not qualitative, decision which sometimes you have to make assumptions for deciding.
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Old 06-23-2013, 08:16 PM   #6
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Right, I don't see why the tIRA would be taxed twice.

Really, the best thing to leave would be appreciated assets in a taxable account. They get to step up the basis when they inherit, so gains on these would never be taxed.
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Old 06-23-2013, 09:59 PM   #7
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As I think about this more, the Roth is better because you have the flexibility to change your investments with no tax implications. However, if at some point you need income for yourself and have a choice between Roth money and an appreciated asset that you wouldn't otherwise be selling, I'd pull from the Roth since that wouldn't be a taxable event while selling the stock would be.
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Old 06-24-2013, 08:31 AM   #8
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Thanks everyone for the inputs, suggestions, etc. It's really making me think!

Our will is over 10 years old and needs to be updated.

GrayHare, I agree that it may warp their perspective of money and the need to save.
Would rather they use money to pay off house and get out of debt.

During my last 5 years of working the wife and I really ramped down our spending,
looking toward ER. I expect our spending to increase slightly over the years,
travel more, maybe fill some empty slots in the wine cabinet, etc.

Thanks again for all the inputs.
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