Craig Wear explains why traditional IRAs create a tax trap for heirs: they don't get a step-up in basis, so beneficiaries owe income tax on the full amount. Roth conversions let you move that money into accounts that grow tax-free and pass to heirs without a tax bill.
So what can you do alongside estate planning just to make sure your children get to keep as much of your wealth as planned?
Well, that's where the different asset types kind of work in our favor, right? Because retirement accounts don't have a step-up in basis, there are other rules that make a big difference when used strategically. And when it comes to retirement accounts, that difference matters really more than most families realize because while a traditional IRA adds taxable income, A Roth IRA doesn't. So if we can move the IRA funds into a Roth IRA, our kids inherit more of that money and withdraw it totally tax-free. And that's where Roth conversions start to matter.
And by moving it into a Roth IRA, you're still keeping that money where it can keep growing without causing a massive tax problem for your children.
