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Should mom convert her IRA to a Roth so we save on taxes?

Q. Me and my two sisters are in line to inherit my mom’s IRA. We will divide the inheritance in three ways. She currently has $ 900,000 in a traditional IRA and I wonder if it is better for her to turn it into a Roth IRA so that my sisters and I can live off the Roth IRA with a tax-free withdrawal of the cost of living. Is it a better job for the three of us kids? I’m thinking if it costs converting an IRA to a Roth 20% tax, it would cost $ 180,000, and it would add us $ 720,000 to the Roth IRA, or $ 240,000 for each child. If the traditional IRA remained, three children would receive $ 300,000 each, and at the age of 72.5 we would have to make RMDs and pay taxes on them. What do you think?

– Future user

ANSWER: Your is a great question.

The real answer is that it depends.

First, however, we need to clarify what happens when you eventually inherit the account.

As children of the deceased, you would inherit a traditional IRA or Roth IRA and should take over the distribution through a 10-year period starting from the moment of death, said Jody D’Agostini, a certified financial planner at Equitable Advisors / Falcon Financial Group of Morristown.

If it was in a traditional IRA, everything would be taxed at normal income tax rates, she said.

“If you take it in 10 equal steps, it’s $ 30,000 a year for 10 years, which, depending on your individual tax brackets, may or may not cost you,” she said. “If this turns into a Roth IRA, you’ll also start taking your estimated $ 240,000 over 10 years, but this would be tax-free for $ 24,000 a year.”

It is also important to note that you do not have to withdraw payments in equal amounts each year, but you can take them however you want as long as the account is emptied at the end 10 years.

Now, if your mother converts the entire IRA in one year it would probably lose almost half of the tax, D’Agostini said. Again, a whopping $ 900,000 would be fully taxable at normal income tax rates.

“It would be in the highest federal tax bracket and close to the highest income tax rates in New Jersey, losing probably more than 40% of the tax,” D’Agostini said. “This would seriously affect the account balance. Alternatively, she could decide convert some over the years to reduce the tax impact or choose to convert a part and leave a part, giving you a non-taxable income while a part is taxed at the usual rates. This could be a good compromise. ”

Email your questions to Ask@NJMoneyHelp.com.

Karin Price Mueller writes Bamboozled column for NJ Advance Media and is the founder NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find it NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly e-newsletter.