Magical Roths Click here to View as .pdfHello Emmy. I read on the internet that Roth IRAs are ‘magical’ tools for passing money to my heirs and that I should convert. Is this just sorcery?Sorcery, conversion - what loaded metaphors.Roth IRAs do offer several significant advantages over Traditional IRAs, but it’s good to avoid magical thinking. Roths aren't always the best method to pass down wealth. However, when funded at the right time and if left to a much younger beneficiary, a Roth IRA can indeed be a useful tool for transferring wealth to the next generation.All things being equal, inheriting a Roth IRA over a Traditional one is a big boon for the receiver. Uncle Sam gets nothing and your loved one keeps all the money. But if you’re considering converting from a Traditional to a Roth IRA for the purpose of passing it on, there are important variables to factor in: namely, tax brackets – both yours and your heir’s.If the tax rate you’ll pay at the time of conversion is roughly equal to the tax rate your heirs would pay when they take their distributions, there’s probably an advantage in converting. If the beneficiary’s future tax rate ends up lower than yours at the time you convert, then money could possibly be lost.The ideal circumstance is this: If your tax rate during the conversion process is lower than your beneficiary’s tax rate during distribution. In this case, using a Roth IRA as an inheritance vehicle can make good sense.Taxation shouldn’t be your only consideration. Having greater distribution control is another positive factor. Keep in mind that distribution rules and tax rates may change in the future. Even the benefits of the best laid plan can vanish with a wave of congress’s magic wand. In fact, a proposed 2016 budget – that was not enacted - intentionally chipped away at benefits found from Roth conversions.Fewer and fewer American companies provide strong retirement benefits for their employees. In 1974, the federal government devised Individual Retirement Accounts to counter the effects of this trend. IRAs offer significant tax advantages that encourage workers to save money early to help avoid looming poverty in their old age. When everything goes according to Hoyle, an IRA should be depleted when the heavens call.Using an IRA to transfer tax-deferred wealth to the next generation had become an unintended benefit. Then in 2010, the IRS lifted income restrictions for converting to a Roth IRA – essentially legitimizing this ‘back door’ inheritance method. According to Forbes, after 2010 Traditional-to-Roth IRA conversions increased by 800 percent.With the flood gates opened, untaxed earnings flowed freely. It’s not unexpected that the government still wants to get its slice of your income – to pay for roads and schools and such. So someday, the folks in Washington may close this little loophole.