The Motley Fool Discussion Boards

Previous Page

Retirement Discussions / Retired Fools

URL:  http://boards.fool.com/greetings-david-and-welcome-you-wrote-11692768.aspx

Subject:  Re: Traditional IRA to Roth Conversion Date:  12/21/1999  6:35 PM
Author:  TMFPixy Number:  1040 of 19741

Greetings, David, and welcome. You wrote:

<<Assuming that any taxes paid on conversion can be deducted from Estate Taxes; who, pray tell, is going to be able to determine, in reality, what taxes were paid and be able to find the documentation? >>

I think you have misunderstood what the poster was trying to get across. The income taxes paid on conversion have nothing to do with deductions from Estate Taxes and everything to do with getting taxable assets out of one's estate. Say you have an estate large enough to be taxed, and it includes a $100K IRA. Also say that money would be taxed for estate tax purposes at 40%, or $40K. The rest would pass to your children, but they would also be taxed at ordinary income taxes on the $60K they get. In simple terms, if that was in a 28% tax bracket, they would net $43.2K. In total, the gummint would get $56.8K on that IRA. If it grew at 8.45%, then five years later it would be worth $150K. Die then, and after all taxes the kids would net $64.8K after estate taxes and income taxes.

Alternatively, say you convert that IRA to a Roth and only pay 28% on the conversion, so the cost is $28,000. You do that, and die immediately. the $72K left in the Roth still is subject to estate taxes of 40%, so another $28.8K goes to the government, In total, then, the family still pays $56.8K in taxes and the kids still collect $43.2K. But if you live and the IRA continues to grow, there are no more income