Roth Conversions May Be Boon for Heirs

(Image credit: Jason York)

published 28 March 2017

Should you convert a traditional IRA to a Roth? It seems like a stickier question the older you get. But if you plan to leave the IRA to an heir, paying the tax bill to convert now can make sense because the Roth can grow tax-free not only over your lifetime, but your heir's lifetime, too. A study by the Vanguard Group shows that in some circumstances, converting can result in a larger legacy for your loved one than if you passed on a traditional IRA.

Why You Need a Roth IRA

But the results are even better if the IRA owner pays the Roth conversion tax bill with the $28,000 in the taxable account. When the heir inherits the Roth 20 years later, he receives about $10,000 more than if the tax bill is paid with IRA funds. The heir reinvests his tax-free RMDs in a taxable account, and 10 years later the two accounts hold $602,461 -- nearly $30,000 more than if IRA money is used to pay the tax.