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Most people think of a Roth IRA conversion as a way to generate tax-free income for their retirement. But a recent Vanguard study shows that converting savings in a traditional IRA or 401(k) to a Roth IRA may also be able to help you leave a bigger legacy to your heirs.

The rub: Determining the extent to which your beneficiaries will benefit from a conversion—or for that matter whether they'll be better off at all—may be trickier than you think.

At first glance, deciding whether to pass along assets to your heirs in a traditional tax-deferred IRA or convert the account to a Roth IRA may seem like a no-brainer. After all, if your beneficiaries inherit a traditional tax-deferred account, they'll owe income taxes when they pull the money out. Funds in a Roth IRA, by contrast, can be withdrawn tax free. So a Roth is the obvious winner, right?

Not necessarily. Whether your beneficiaries will come out ahead by inheriting money in tax-deferred or tax-free accounts depends on a number of factors, including your marginal tax rate when you convert savings to a Roth, your heirs' marginal tax rate when they withdraw the funds, how you pay the taxes on the conversion and how long the money remains in the Roth. Adding to the uncertainty now is the prospect of tax rates being lowered under President Donald Trump. That's a reason to think about waiting even if a conversion seems to be in your family's interest.

To gauge whether converting assets held in a traditional IRA to a Roth IRA and then bequeathing the Roth can leave a beneficiary with more after-tax dollars, consider an example in the Vanguard study: a hypothetical 65-year-old in the 28% income tax bracket with $100,000 in a traditional IRA and $28,000 in a taxable account who would like to leave a legacy to a 40-year-old non-spouse beneficiary who is also in the 28% bracket.

One option is for the 65-year-old to convert the traditional IRA to a Roth IRA and use the $28,000 from the taxable account to pay the income tax due from the conversion. He or she would thus bequeath the beneficiary $100,000 of tax-free funds in a Roth IRA. Another option is to skip the conversion and simply leave the beneficiary the $100,000 in the traditional IRA and the $28,000 in the taxable account. The assumption is that in both options all the money is invested in a 50-50 mix of stocks and bonds that earns 6% a year and that all gains are reinvested.

(The study also includes a third possibility, doing the conversion and paying taxes from the funds held in the traditional IRA. But I've excluded that option since less money makes its way into the Roth if taxes are paid with funds from the traditional IRA, making the conversion less effective.)

Vanguard calculated how much money the beneficiary would inherit after income taxes under the two options described above, assuming the account owner dies 20 years later at age 85, at which point the beneficiary would be 60 years old.

So how does the beneficiary fare under each of the options? Well, if the account owner converts, Vanguard estimates that the beneficiary would inherit a Roth IRA at age 60 with a tax-free balance of roughly $340,000. If, on the other hand, the account owner forgoes the conversion, the beneficiary would inherit the traditional IRA and taxable account, which Vanguard estimates would have an after-tax value of approximately $323,000.

Bottom line: By doing the conversion, the account owner would leave the beneficiary with about $17,000 extra after taxes, or about 5% more had the beneficiary inherited the traditional IRA and taxable account and paid any income taxes due on both accounts. In short, if the goal is to leave the beneficiary with more money, doing the conversion would appear to be the smarter move.

But just because converting to a Roth comes out ahead in this scenario doesn't mean it always will. To see how the outcome might change, I asked Vanguard to run a few scenarios where the account owner's tax rate and the beneficiary's aren't the same.

So, for example, if you take the same scenario described above but assume the beneficiary is in a lower tax bracket—say, 15% for the beneficiary vs. 28% for the account owner—the traditional IRA plus taxable account comes out slightly ahead of the Roth. The margin is small, about 1%, or $344,000 vs. $340,000. The difference in favor of the traditional IRA plus taxable account grows, however, if the beneficiary is in much lower tax rate than the account owner. If you assume, for example, that the account owner faces a 35% marginal tax rate while the beneficiary pays tax at a 15% rate, then the traditional IRA plus taxable account beats the Roth by a somewhat wider margin of almost 3%, or $349,000 vs. $340,000.

Of course, the pendulum swings the other way if the beneficiary's marginal rate is higher than the account owner's. If the account owner faces a marginal tax rate of 28% while the beneficiary is in the 35% bracket, the Roth conversion comes out much farther ahead: $340,000 vs. $312,000, or by about 9%. The conversion would do even better if the gap were larger, say, with the account owner facing a 15% marginal tax rate and the beneficiary in the 35% bracket.

These examples show that tax rates are a major consideration when deciding whether to convert. Generally, converting to a Roth makes more sense if your marginal tax rate is lower that what your beneficiary's rate will be later on. In effect, you're arbitraging tax rates to your benefit, paying the tax for the conversion when your rate is lower and avoiding what would be a tax hit at a higher rate when the funds are withdrawn later on.

But tax rates aren't the only factor. If they were, then you would expect the outcome in Vanguard's original example where the account owner and beneficiary face the same marginal tax rate to be a toss-up, with the beneficiary faring as well whether the account owner converted to a Roth or not.

In fact, two other issues come into play that can give a conversion an advantage. One is paying the conversion tax—$28,000 in Vanguard's original example—with funds from outside the traditional IRA account. By doing that the entire $100,000 in the traditional IRA gets to stay in the Roth after the conversion rather than just $72,000 if you had to pay the $28,000 conversion tax bill from the $100,000 in the traditional IRA. That effectively allows the $28,000 to rack-up a tax-free 6% return within the Roth instead of remaining in the taxable account where taxes on investment gains would result in a lower after-tax return.

The second factor is that, starting at age 70 1/2, owners of traditional IRA accounts must begin making required minimum distributions (RMDs) and paying taxes on the withdrawals. Roth IRAs, by contrast, are not subject to required withdrawals until the non-spouse beneficiary inherits the account. That means that money can compound longer without the drag of taxes in the Roth IRA than in the traditional IRA.

These two factors definitely work in the Roth's favor. But whether they can have a large enough impact to make a Roth conversion the better option in cases where the beneficiary is in a lower tax bracket depends on how long it is before the beneficiary inherits the accounts and withdraws the funds and how much lower the beneficiary's tax rate is than the rate at which the account owner did the conversion.

So, for example, in the scenario I asked Vanguard to run with the account owner in the 28% tax bracket and the beneficiary in the 15% bracket, the Roth conversion was still slightly behind even after 20 years despite the advantages of paying the conversion tax with funds from outside the IRA account and the account owner having no RMDs.

If the drop in tax rates from the account owner to the beneficiary isn't as steep, however, then the dual advantages of no RMDs and paying the tax from funds outside the IRA are more easily able to turn things in the conversion's favor. For example, if the account owner is in the 35% tax bracket and the beneficiary is in the 28% bracket, those two advantages are enough to put the conversion ahead of the traditional IRA plus taxable account by nearly 4% after 20 years, $340,000 vs. $328,000.

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All of which is to say that converting to a Roth isn't automatically a slam-dunk winner. A bunch of variables, many of which can be hard to predict, can affect whether converting is the better option—the marginal tax rate you pay when you convert; whether the taxable income generated by the conversion itself pushes you into a higher tax bracket; the tax rate your beneficiary faces; how long the funds remain in the Roth before your beneficiary inherits the account and how quickly the beneficiary withdraws the funds; and whether converting might reduce any estate taxes due upon your death.

So if you're considering a Roth conversion to benefit your heirs, run the numbers before making your decision, especially if you believe there's a chance your beneficiary may be in a lower tax bracket than you when you convert. Consider holding off on a conversion to see what Washington does with tax rates since a drop in your rate would lower the cost (although you’ll still have to factor into your decision the tax rate your beneficiary might face when withdrawing the funds). And while you're at it, consider whether you might need to dip into those assets for your own needs during retirement, in which case the tax rate you pay when the money is withdrawn (as opposed to your beneficiary's tax rate) also matters.

Roth conversion calculators like those offered online by Fidelity and Vanguard may be able to provide some help with the number crunching, but as I'm sure you've guessed by now, this task can get pretty complicated. So if you're uncomfortable doing this sort of analysis on your own or you're dealing with substantial sums of money, you might consider hiring a pro who can run a variety of different scenarios and help you arrive at a decision that makes sense for your particular circumstances.

Just don't make the mistake of assuming that a Roth conversion is the right choice for you or your heirs simply because withdrawals are tax-free.

Walter Updegrave is the editor of If you have a question on retirement or investing that you would like Walter to answer online, send it to him at You can tweet Walter at @RealDealRetire.