BY STEVE DINNEN
The idea here is to let the money grow tax free in a Roth instead of taxable with a traditional IRA. Also, there are no required minimum distributions like there are on traditional IRAs.
Kevin Wingert, at American Retirement Systems in Urbandale, works with nationally known financial planner Ed Slott and provides this example. A couple has taxable income of $100,000. The first $19,500 in taxed at 10 percent, the next $58,350 is taxed at 12 percent and the remaining $22,600 is at 22 percent. They have another $65,000 of taxable income before hitting the 24 percent tax bracket. So, use some of the remaining 22 percent tax bracket to get funds into the tax-free Roth, as you have to pay taxes on funds rolled out of a traditional IRA.
If a child inherits a big lump sum from a traditional IRA all in one year, they could very well end up in a much higher tax bracket since it’s all taxed as ordinary income in the year they take it. Funds inherited from a Roth IRA are tax free.