IRA inheritance (roth vs traditional)

[stephen902]

Suppose you are a high earner who will have more than enough money for FI without ever depending on your IRA. Let's say the tax bracket is 35% in 2018. So despite all prevailing wisdom, you place your work-place 403b as a roth contribution and max it out each year. Time passes. You die. What do you guys think the difference would be from an inheritance standpoint between the choice of a traditional vs a roth. Let's make the assumption that the wealth of the estate exceeds inheritance-exception by 50%. Let's also recognize the laws could change in the future and probably not in the favor of the aforementioned estate. Last assumption, let's give the high-earner a nice long life in which the roth will benefit from no RMD for say 10 years beyond a traditional IRA.

[MDM]

Let's make the assumption that the wealth of the estate exceeds inheritance-exception by 50%.

There are many moving parts to this.  For the quoted sentence, what does that mean in terms of the tax rate paid on the IRA balance at death?  Would the tax rate be the same if this were a traditional IRA?

For some other assumptions one needs, see input cells in the range H5-H18 on tab '401k vs Taxable' in the case study spreadsheet.

Also, had this been a traditional,
- What tax rate would have been paid on RMDs?
- What would the tax rate have been on withdrawals by the heirs had this been a traditional IRA?

[stephen902]

I agree. So many unknown variables. Let's not get into the weeds too deep. My thinking is around two factors:

(1. avoiding the MDR could potentially be huge from an inheritance standpoint especially if a person has faithfully maxed out a 403b ROTH and lived a long ilfe.

(2. As an inheritance tool, my understanding is the heirs can take it as a lump sum with no tax or setup a  “inherited Roth IRA.” (see: https://www.marketwatch.com/story/i-inherited-a-roth-ira-now-what-2013-06-28)

So I'm just wondering if despite being in a high tax bracket, maybe one should contribute to a roth if they never expect to actually need that money to live.

[MDM]

I agree. So many unknown variables. Let's not get into the weeds too deep. My thinking is around two factors:

(1. avoiding the MDR could potentially be huge from an inheritance standpoint especially if a person has faithfully maxed out a 403b ROTH and lived a long ilfe.

(2. As an inheritance tool, my understanding is the heirs can take it as a lump sum with no tax or setup a  “inherited Roth IRA.” (see: https://www.marketwatch.com/story/i-inherited-a-roth-ira-now-what-2013-06-28)

So I'm just wondering if despite being in a high tax bracket, maybe one should contribute to a roth if they never expect to actually need that money to live.

If Roth is used for contribution, that means a 35% tax bite has occurred.

If traditional is used, and no RMDs occurred, no tax bite occurs until the heirs withdraw.  Now one needs to know the heirs' marginal rates....

The fraction distributed as RMDs, and the tax rate paid on those, does indeed matter.

[BTDretire]

I agree. So many unknown variables. Let's not get into the weeds too deep. My thinking is around two factors:

(1. avoiding the MDR could potentially be huge from an inheritance standpoint especially if a person has faithfully maxed out a 403b ROTH and lived a long ilfe.

(2. As an inheritance tool, my understanding is the heirs can take it as a lump sum with no tax or setup a  “inherited Roth IRA.” (see: https://www.marketwatch.com/story/i-inherited-a-roth-ira-now-what-2013-06-28)

So I'm just wondering if despite being in a high tax bracket, maybe one should contribute to a roth if they never expect to actually need that money to live.

If Roth is used for contribution, that means a 35% tax bite has occurred.

If traditional is used, and no RMDs occurred, no tax bite occurs until the heirs withdraw.  Now one needs to know the heirs' marginal rates....

 But if the heirs tax rate is 25%, that makes the Roth conversion a poor financial decision.
  From what I have found, the only financial win, is a conversion in a lower tax bracket and withdrawals in a higher tax bracket.

The fraction distributed as RMDs, and the tax rate paid on those, does indeed matter.

[stephen902]

How much interest-free money do you make in a roth during the MRD time period from a traditional IRA? I know it depends on how long you live, but I think it would make a substantial difference.