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Investing/Strategies / Retirement Investing
|Subject: Re: How to invest parents' money||Date: 9/9/1999 1:20 PM|
|Author: TMFPixy||Number: 13818 of 76418|
Greetings, NoelXX, and welcome. You wrote:
<<Hello,Pixy: Regarding your response to Billybeau's query. My father has a fully-funded IRA and he hopes it will survive him for his children to inherit, but he also has to consider it his "safety net". He's been real upfront about this. Are you suggesting that he turn the entire IRA into assets in some other type of investment?>>
No, I'm not suggesting this. In the original query, the writer's parents were over the age of 70 1/2, were taking mandatory minimum required dstributions (MRD) from their IRAs, and didn't need the income. They were concerned only with passing as much on to heirs as they could. The question dealt with whether other savings or the IRA should be used for investments that could grow for the heirs. I simply pointed out that heirs would pay income tax on anything they received from the IRA, whereas they would pay no income taxes on an investment they inherited from a taxable account. In that case, seeing as the parents had to pay income taxes on the MRD anyway, the IRA would make a great source for funding an investment for heirs.
<<I understand that his taxes are less at his age on his required yearly withdrawals, but that for his heirs, taxes on other types of investments would be at ordinary rates. >>
You misunderstand how IRAs are taxed. You father will pay ordinary income tax rates on anything he takes from the IRA (assuming all contributions were deductible when he made them). Whatever heirs take from the IRA at his death will be taxed at their ordinary income tax rates as well.
<<However, if he has over 100K, would it still be to his long-term advantage to lose such a large amount all at once to taxes, and isn't it the same thing as rolling over into a Roth IRA? And if so, isn't that better ? Or can someone who no longer contributes to his IRA own a Roth?>>
If he elected a full distribution from his IRA, then he would be taxed at ordinary rates on the amount taken. That's exactly the same thing that would happen if he elected to transfer those proceeds to a Roth IRA. I doubt highly that would be to his advantage, but it very well might work to his heirs advantage. If the net proceeds were in a Roth IRA at death, the heirs would pay no income tax on what they inherited. That's the same thing that would happen if they inherited a taxable investment account. In your father's case, though, he has made it clear he wants that IRA as a safety net in case he needs the cash. In that case, IMHO he should probably leave the account as it is. I have seen very few cases where paying the taxes up front (whether as part of a conversion to a Roth or simply to take the proceeds) is advantageous to the owner during his/her lifetime. To heirs, yes, but to the owner, no. You would have to do a very detailed analysis to determine the overall effects in your father's case.
<< By the way, what's an RP4?>>
The RP4 is the Foolish Four startegy of investing in Dow stocks. You will find an explanation of that in the Dow area at http://www.fool.com/school/dowinvesting/dowinvesting.htm.
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