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Roth Conversions May Be Boon for Heirs

A new study shows the benefit of converting sooner for your loved ones.

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.

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.

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Paying the tax bill with outside funds keeps more money in the tax shelter, supercharging the growth and giving you a bigger bang for your tax bucks. "It's the better way to go," Bruno says.

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But it's the Roth's benefits for the heir that also pump up his inherited wealth. Tax-free RMDs mean he can fully reinvest the withdrawals. And the money still sitting in the inherited Roth continues to grow tax-free over his own lifetime.

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