Why?
1) By the time I’m 65 my mortgage will be paid off – no tax deductible there. I’ll probably invest the rest and be taxed on any gains/dividends!

2) No dependents – kids had better be out of the house and my Wife who is a homemaker now, will probably work outside the home in a few years too

Between those two big deductions going away my Federal tax rate will be quite a bit higher than it is now. That’s why I’m very happy to pay taxes now rather than later.

Also, if they had converted ALL their tax-deferred retirement to Roth, then they would have had less money to cover their own expenses during their last few years of life, and less money to leave to you. They would have had to pay taxes on all these funds at their marginal rate, effectively paying taxes on all of it when part of it would have been untaxed anyway due to standard deductions and personal exemptions.

So I doubt that you are worse off for them not having converted to Roth. Quite possibly you are better off. Reading between the lines, sounds like you may be under-employed. If so, get your career back on track and find an employer with a good 401k plan, one which will allow you to contribute the IRS maximum of $15.5K plus an additional $5K if you’re over 50. Then contribute an appropriate amount plus add an equal amount according to what the distributions from your inherited IRA is. Only if your tax-deferred savings is going to exceed $250K ($500K if married) in equivalent 2007 dollars should you worry about Roth conversions.

I’d be willing to pay a significant penalty (e.g., 25%, no withdrawals before age 65) if I could convert this to some form of Roth.

Treasury would get more money, a lot sooner.

If I withdraw it all now, it costs me 45%.

Had the opportunity to convert it to Roth 10 years ago, when you could spread out the taxes over years.

Because of the uncertainty of what would happen if they died before the 4 (or 5) years of the Roth, didn’t do it.

That was a major mistake I won’t make for my kids – as much as we plan, the fact remains that there are some conditions where we won’t be able to take care of ourselves, for a decade or more before we die.

Usually it is our heirs who have to take on that responsibility.

Since they may well have to curtail their career to take care of me, as I did for my relative, I’m going to make sure mine don’t lose a third or more in taxes by favoring Roth plans over regular IRA/401K

Most would not be as lucky as me to be able to work for a relative.

Otherwise I’d likely be competing with recent college grads after so long working around my relative’s medical needs.

But in case you decide to ignore the point I expressed in my earlier post, as a taxpayer I’d like to thank you for paying more than your fair share. Maybe if you can persuade enough others to your point of view, then maybe we could have another tax decrease, and I would pay even less taxes.

Bill, now that you have mandatory distributions from the IRA you inherited, did you consider whether your 401k plan would allow you to increase your contributions to cancel out the distributions?

I am the beneficiary of an inherited IRA and get to pay ordinary income tax on the mandatory minium withdrawals (based on my remaining life expectancy)

Within a few years, the minimum withdrawal will likely be enough by itself to push me into the next higher tax bracket, affecting all my earnings (at the margin)

bravo for gail for considering the tax impact on her heirs!

>my children will not need to pay taxes on the Roth when they inherit

In April, I was pleasantly surprised to get a significant amount of money back from the government; as a single head of household with three kids, I unexpectedly qualified for the earned income credit. Basically, I got back everything I had paid into Social Security and Medicare. Not only did I pay off my debt, but I developed a tidy little savings account overnight.

When I reach my one-year anniversary in November, I will become eligible for my company to match 5% of my salary in a 401K. It’s a no-brainer for me to put the remainder of my salary that’s available for savings into a Roth IRA (as soon as I finish saving six months of expenses). You can’t beat no taxes no and no taxes later!

But I also believe that then as now there will be standard deductions and personal exemptions roughly indexed for inflation. I believe that you should have part of your retirement savings on a tax-deferred basis, since the amount of tax-deferred savings that you pull out each year in retirement that’s less than your personal exemption and standard deduction is not taxed at all. Doesn’t make sense to have all your retirement savings in Roth IRAs on which you paid taxes at your marginal rate if your income in retirement is less than that on which you would actually have to start paying taxes.

How much should you save tax-deferred? In 2007, a person over 65 will not be taxed on the first $9800 of taxable income. So assuming 15 years in retirement, spreading $150K of tax-deferred income over that period would be $10K/year or being taxed on only $200. If you’re more optimistic about your life expectancy, and follow the 4% withdrawal rule-of-thumb, then $250K of tax-deferred income at retirement would be appropriate. That’s per person, a married couple could have twice that amount. I would not try to assume a particular inflation rate, just assume indexing with future inflation. See how far you are from this goal Vs how far you are from retirement, and your tax-deferred savings this year should be pro-rated accordingly.

If you’re a boomer and have less than $50K in retirement, then all of your retirement savings should be on a tax-deferred basis. On the other hand, if your tax-deferred savings are $300K or more, time to hit the Roth. Personally, I find my tax-deferred savings are adequate and am converting 401K money to Roth IRA, as my employer doesn’t offer a Roth 401k. And I’m contributing to the traditional 401k to the IRS limits, to make more funds eligible for conversion.

On the other hand, if you’re in your 20′s or 30′s, I recommend that you contribute to both tax-deferred and Roth vehicles (whether Roth 401k or Roth IRA). If your employer offers the Roth 401k with a company match, take that as the company match will be tax deferred anyway. If your employer only offers a traditional 401K, get in that up to the point of getting the employer match (don’t want to pass up free money), then contribute to your Roth IRA.

And keep your eye on the tax situation Vs your personal savings and situation and be ready to adjust your strategy.

Long-term investments (e.g. mutual funds) are taxed at 15% maximum – I’d expect that to go back to 20%, but nowhere near the rate on ordinary income.

>Someone may have enough untaxed income (eg gifts)

Others may be in different circumstances. Someone may have enough untaxed income (eg gifts) that their investments will leave them in a high bracket when they sell. That’s not me, I’m sad to say.

I meant to forward this link to you last night, but forgot:

Roth IRAs and possible future changes in tax laws at the Diehard forums…

For managing risk, you can acctually manage it from year to year and get tax savings. Say you have $10k in a ROTH IRA and $10k in a traditional. If rates go up, you can convert the ROTH (or part of it) to a traditional and take a tax deduction for the ammount. Then, you can convert back if and when rates fall.

My personal view is that rates will go up. So, I am getting as much as possible in ROTH accounts. Then, if rates are high at later points in my carreer, I can convert to traditional to get big tax breaks.

I discussed this in a post on Taxation Diversification a couple months ago – http://broknowrchlatr.mypfblogs.com/2007/03/09/taxation-diversification/

In general, I think people underestimate how much impact the federal government financial decisions have on them. A little bit of research will quickly dispel that belief.

Gal

If you’re already maxing out your traditional 401k, roths actually allow you to save MORE money right now, as the 15k cap is applied to after tax dollars rather than before tax dollars.