Clark Howard’s website recently posted an article about the problem with traditional IRAs:

Adult children inheriting a traditional IRA *might* have to take RMDs. Jeffrey Levine has the gory details:

Regardless of whether an RMD is required, the beneficiary is likely going to want to do some tax planning.

I recently did an in-depth blog post on inherited Roth IRAs:

This video, the show notes, and any comments are for educational purposes only. They do not constitute tax, legal, financial, and/or investment advice for any person. Consult with your own advisors regarding your own matters….(read more)

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Traditional IRAs (Individual Retirement Accounts) have long been a popular choice for Americans planning for retirement. However, these accounts may not be the best option for everyone – particularly those who expect to have a high income in retirement.

The fundamental problem with traditional IRAs is that the money you contribute is tax-deductible at the time of contribution, and you only pay taxes when you withdraw the money in retirement. While this may seem like a great deal, it can actually end up costing you more in taxes in the long run.

When you withdraw money from a traditional IRA in retirement, that money is taxed as income. If you expect to be in a lower tax bracket in retirement than you are now, this can be a great strategy. However, if you expect to be in a higher tax bracket in retirement – for example, if you have a large retirement income from sources like pensions and Social Security – you could end up paying more taxes on your IRA withdrawals than you would have paid on the original contributions.

Additionally, traditional IRAs are subject to Required Minimum Distributions (RMDs) once you reach age 72. This means that even if you don’t need the money in your IRA, you’re required to withdraw a certain amount each year and pay taxes on that money.

So what’s the solution? One option is to consider a Roth IRA instead. Roth IRAs are funded with after-tax dollars, which means you don’t get a tax deduction when you contribute. However, when you withdraw money in retirement, the withdrawals are tax-free as long as you meet certain criteria. This can be a great option if you expect to be in a higher tax bracket in retirement or if you want to avoid RMDs.

Another option is to use a combination of traditional and Roth accounts. By contributing to both types of accounts, you can diversify your tax liability in retirement and have more flexibility to manage your taxes.

In conclusion, traditional IRAs may not be the best choice for everyone. If you expect to be in a higher tax bracket in retirement, it’s worth considering other options like a Roth IRA or a combination of traditional and Roth accounts. By taking a strategic approach to your retirement savings, you can maximize your income and minimize your tax burden.