Worst Provision of Tax Plan- Passing on Tax Free Income to Heirs

[Nathan Newman]

This looks to be the worst provision of the tax plan, allowing people to
create Roth 401Ks and apparently pass on funds to heirs who will themselves
be able to withdraw money tax free.  This will create as far as I can tell
massive pots of wealth untaxed generation to generation.  I can't tell if
it's as bad as this article indicates.

So is it Max?

-- Nathan Newman


>From NYTimes:

"Ed Slott, an accountant in Rockville Centre, N.Y., who publishes Ed Slott's
IRA Advisor, a newsletter, said that most people who expect to leave at
least some money to their children or grandchildren should choose the Roth
401(k). "Yes, you will be putting in after-tax dollars," Mr. Slott said.
"But at the back end you are much better off, because not only will
withdrawals be tax-free, but there is no minimum annual distribution
required. You should think of your Roth 401(k) savings as not so much for
your life as for the lives of your children and grandchildren, who will be
able to draw the money out untaxed over their lifetimes."

Someone who contributes $10,000 to a Roth 401(k) this year, lives 10 years
and then leaves the money to a teen-age grandchild is making a gift worth
more than $600,000, tax-free, over that grandchild's projected lifetime,
assuming an 8 percent annual return.

Daniel Halpin of Grant Thornton, the accounting firm, said that once the
Roth 401(k) starts, "there would no longer be a reason to make after- tax
contributions to a 401(k) unless they are Roth contributions."

Individuals who expect to use their 401(k) savings in retirement, rather
than pass the money along to heirs, might prefer traditional 401(k) plans if
they expect to be in a lower tax bracket after they stop working. "