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Subject:  Re: Smart Tax Planning: 12/27/99 by TMF Pixy Date:  1/6/2000  5:19 PM
Author:  TMFPixy Number:  17442 of 88494

Greetings, Cabweb58, and welcome. You wrote:

<<After reading subject article several times, I still have questions in my mind relating to the last paragraph of the article which concludes that conversion of a Traditional IRA to a Roth IRA is not beneficial.

It seems to me that conversion to a Roth AND paying the taxes due out of funds that are OUTSIDE the IRA, simply gives you a method to make a large contribution to the Roth, which will grow taxFREE, instead of tax deferred. (If taxes are paid by withdrawing additional funds out of the Trad. IRA, any advantage is lost.) In addition, the gross estate is reduced by the amount of the taxes paid. Funds remaing in the Trad. IRA until death are subject to estate tax and ALSO subject to income tax.

It also appears that using funds from the taxable account, particularly funds from dividends and interest, would be preferrable to withdrawing funds from the taxfree Roth. Assuming that the equity investments held in the account continue to grow and are not sold prior to death, any gains in them would also be income tax free. However, any change in the securities held would trigger capital gains taxes.

Please explain to me what is wrong with my logic for estates large enough to subject to significant estate taxes.>>

I, for one, wouldn't fault your logic at all provided sufficient assets existed outside the converted IRA to pay the tax bill. Each case is different, and folks must look at their own situation as opposed to a general example. In the scenario you outlined, the conversion may very well result in better numbers. All you can do is run them to see. As I said in the article, converting to a Roth still resulted in a higher tax savings anyway, just not as high than they got by using the traditional IRA first. Your question goes to the issue of whether they can beat those results, and I would concede that it's possible under a different set of assumptions. The real issue is that the conventional wisdom of using taxable accounts first no longer seems sensible under present tax law.

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