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Author: cabweb58 Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 19026  
Subject: Traditional IRA to Roth Conversion Date: 12/21/1999 12:48 PM
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TMF Pixey's analysis today does not consider the effect of estate taxes. Those of you who have estates large enough to pay ESTATE TAXES would benefit greatly from the conversion since all the income taxes paid on the conversion would be removed from the taxable estate. If the conversion is not made, the entire amount is subject to estate taxes. This advantage, in addition to the TAX FREE growth, make the conversion very desirable if there are sufficient assets to pay the income tax on conversion, outside the IRA.
BILL
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1034 of 19026
Subject: Re: Traditional IRA to Roth Conversion Date: 12/21/1999 1:26 PM
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Greetings, Bill, and welcome. You wrote:

<<TMF Pixey's analysis today does not consider the effect of estate taxes. Those of you who have estates large enough to pay ESTATE TAXES would benefit greatly from the conversion since all the income taxes paid on the conversion would be removed from the taxable estate. If the conversion is not made, the entire amount is subject to estate taxes. This advantage, in addition to the TAX FREE growth, make the conversion very desirable if there are sufficient assets to pay the income tax on conversion, outside the IRA.>>

You are correct I did not address the estate taxation issue in this analysis. And, considered in isolation, conversion to a Roth may be beneficial to some folks because of it. However, I will be addressing a broader issue in next week's column that obviates against it, even for those with large estates.

Regards..Pixy

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Author: davehartz Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1037 of 19026
Subject: Re: Traditional IRA to Roth Conversion Date: 12/21/1999 5:17 PM
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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?

To think that an executor will be able to do that is asking for a lot. To think that the decedent kept records that show the details is wishing for a lot.

In reality, people do not keep very good records. Some, with a lot of wealth, that hire professionals, probably have a 50/50 chance of leaving organized financial records.
David

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1040 of 19026
Subject: Re: Traditional IRA to Roth Conversion Date: 12/21/1999 6:35 PM
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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 taxes for the kids to worry about. Growing at 8.45% for five years, that $72K would be $108,014. After estate taxes, the kids would net $77,770. By converting, they get more and the government gets less. By using the conversion you saved the the kids from having to pay income taxes on the inherited IRA. Additionally, anything you take from that IRA in life will not count against your AGI, which means the potential of taxation on your Social Security declines as well.

That's another reason why one must examine the issue of conversions closely. It is not the same for everyone. In some cases it's beneficial, in some it's not. But you don't know until you run the numbers.

Regards..Pixy

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Author: Chipsboss Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1042 of 19026
Subject: Re: Traditional IRA to Roth Conversion Date: 12/21/1999 6:43 PM
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Pixy;

In your article, will you consider the possible advantage of making a partial conversion of a regual IRA to a Roth IRA?

At age 60 I don't think I can live long enough to recoup the losses to income tax that would result from a complete conversion of my IRA to a Roth IRA. Throughout my 60's, I have the option of taking withdrawals or not taking them. Making small IRA withdrawals, around 1% or 2% a year, and sticking the money in a Roth IRA, benefits my retirement plan. The numbers tell me that it's worthwhile to pay some extra income tax in my 60's to shave a little off my much-higher income taxes when I have to start my IRA withdrawals at 70. That result surprised me. Folks usually say to let the tax-sheltered money ride as long as possible and legal.

Also, will you address the advantages of making charitable bequests from the IRA, so as to avoid income taxes and estate taxes on that part of the IRA?

Chipsboss

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Author: raydotfong Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1047 of 19026
Subject: Re: Traditional IRA to Roth Conversion Date: 12/22/1999 12:18 AM
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I must be fooled! If in the second scenario the $108,014 is estate taxed, is it at 40%? If it is, then the kids are left with $64,808 with no income taxes to pay, and not the $77,770 listed. This makes it an even trade with the first scenario. Did I make an error somewhere? Thanks for checking.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1050 of 19026
Subject: Re: Traditional IRA to Roth Conversion Date: 12/22/1999 10:27 AM
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Greetings, Chipsboss, and welcome. You asked:

<<In your article, will you consider the possible advantage of making a partial conversion of a regual IRA to a Roth IRA?

At age 60 I don't think I can live long enough to recoup the losses to income tax that would result from a complete conversion of my IRA to a Roth IRA. Throughout my 60's, I have the option of taking withdrawals or not taking them. Making small IRA withdrawals, around 1% or 2% a year, and sticking the money in a Roth IRA, benefits my retirement plan. The numbers tell me that it's worthwhile to pay some extra income tax in my 60's to shave a little off my much-higher income taxes when I have to start my IRA withdrawals at 70. That result surprised me. Folks usually say to let the tax-sheltered money ride as long as possible and legal.

Also, will you address the advantages of making charitable bequests from the IRA, so as to avoid income taxes and estate taxes on that part of the IRA?>>


Neither of those issues will be addressed in the next article. After all, both are complicated subjects and there's only so much I can say in 1,200 words or so. However, I will talk to both in future articles over the next year in one way or another.

Regards..Pixy


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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 1052 of 19026
Subject: Re: Traditional IRA to Roth Conversion Date: 12/22/1999 10:31 AM
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Greetings, Raydotfong, and welcome. You wrote:

<<I must be fooled! If in the second scenario the $108,014 is estate taxed, is it at 40%? If it is, then the kids are left with $64,808 with no income taxes to pay, and not the $77,770 listed. This makes it an even trade with the first scenario. Did I make an error somewhere? Thanks for checking>>

And thank you for doublechecking my math. No, you're not fooled, I am. Somewhere I miskeyed an entry. In this stupid example (that's what I get for trying to come up with something uncomplicated) the results will be exactly the same. Thus, this example will not work. Nevertheless, for high net worth individuals, paying taxes on a conversion to a Roth usually benefits the family as a whole due to the interaction of estate taxes on the gross estate, income taxes on inherited traditional IRA, and something called an IRC 691(c) deduction available to the heirs for the inherited IRA. When all of those factors are integrated with the entire estate (i.e., not just the IRA) and because the money used to pay those taxes now is removed from that gross estate, the overall tax burden to the family is lessened. It's a very complicated issue best left for discussion and analysis with a qualified estate attorney. For those with modest estates, it has little applicability.

Regards..Pixy

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