In this video Craig Wear, CFP®, warns IRA millionaires that the tax code contains three major "back doors" that can erode a traditional IRA vault: (1) forced income through required minimum distributions (RMDs) that begin at age 73/75, (2) higher tax liability for a surviving spouse filing single, and (3) the 10‑year rule that forces heirs to withdraw a traditional IRA quickly, creating a large tax bill. Using a fictional couple, Bill (63) and Susan (61) with $1.5 million in IRAs, he contrasts a do‑nothing approach (resulting in about $2.5 million total family tax) with a custom Roth‑conversion plan that deliberately converts large sums—sometimes above the current tax bracket—to eliminate RMDs, protect the surviving spouse, and reduce heirs’ taxes. The custom plan cuts total family tax to roughly $550 k, saving $1.95 million. Craig emphasizes the importance of estimating future RMD amounts, using a free RMD calculator he provides, and then designing a conversion schedule. He also points viewers to a follow‑up video on how to fund the conversion taxes efficiently.
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Hey there. So for 3 or 4 decades, you've managed your retirement money wisely and built a traditional IRA worth $1 million or more. It's like you've built yourself and your family a vault. Good job. But what most IRA millionaires don't realize is that the tax code leaves 3 back doors into that vault, and the IRS just loves to reach through them. So today I'd like to show you all 3 and how a strategic conversion plan can keep $500,000 or more of your money in the vault and less of it going out those back doors. By the way, I'm Craig. And my team of Rothologists and I have helped IRA millionaires avoid over $10 billion in projected lifetime taxes with exactly this kind of planning. So let's start with the backdoor that affects you first. Backdoor number 1, it's the forced income trap and it gets opened at age 73 or age 75 if you were born in 1960 or later. That's when money starts coming out of your traditional IRA every single year, whether you need the income or not. Those forced withdrawals are called required minimum distributions. You You have heard of them as RMDs. Up to that point, you decided what came out and when. Once RMDs begin, the government starts forcing money out on their schedule. Up until this point, you've been able to enjoy growth in your IRA and worry about taxes later. And RMDs are the government's way of saying, okay, well, later has finally arrived. Now it's time to pay the piper. There are different ways to deal with this first backdoor. Let me show you by following a couple we'll call Bill and Susan. He's 63, she's 61, and they have about $1.5 million in their IRAs. Your The numbers are going to be different, but the math kind of works the same way. Now, let's look at 2 possible strategies for Bill and Susan. First, they do nothing. The forced withdrawals start at about $105,000 a year. Over Bill and Susan's lifetime, they pay about $1.3 million in total lifetime taxes. Then the kids inherit what's left, and they owe another $1.2 million. The total family tax bill is about $2.5 million. Not as great an outcome as what I think any of us would want. The second strategy is moving money from the IRA into a Roth IRA. That's called Roth conversion. You pay the tax on the money you convert now, and from then on, it grows totally tax-free, and it passes to your heirs tax-free. We love Roth conversions, but there's a lot of differing advice on the best way to go about it. The common advice is for you to convert up to the top of your current tax bracket each year and just stop. And on a smaller account, that's fine, probably the best way to do it. But look at the clock. Required distributions start in your 70s. If you're 63 with $1.5 million, converting in small bites inside of a low bracket Man, you run out of years before you run out of IRA. You'll cut the problem down some, but it's hundreds of thousands of dollars short of a more strategic approach. So instead, let's look at what happens when Bill and Susan follow a custom conversion plan. It includes a large conversion that takes them above their current tax bracket. And if that raises any flags for you, good. That means you're paying attention. Yes, converting above your tax bracket will give you a short period of higher taxes and higher Medicare costs, but consider it a small bump in the road that is all smooth sailing once you get past that part. Under that plan, the total family tax is about $550,000 compared to the do-nothing plan, that's $1.95 million less in tax. Now, that's more like it. So how do you neutralize the RMD backdoor in your vault? You start by estimating what the account will hold once those withdrawals begin. From there, you can see how much money needs to move and how many years you've got to move it. We built a free RMD calculator for a Exactly this reason, and it's in the link below. You put in your numbers and it shows you your forced income year by year on the path that you're on right now, along with what a custom conversion plan could save you in lifetime taxes, actually showing you what clients just like you have actually been able to avoid by using an accelerated conversion plan that we developed for them. It's really the best first step to a custom plan is for you to know what your numbers are. Okay, so that takes care of backdoor number 1. Backdoor number 2 is about the person you care about most in this world. It's a hard It's a sad thing to think about, but if you're married, one of you is going to file a tax return alone someday. The plan for those years has to be built while both of you are still here. Most couples assume the survivor's taxes won't change dramatically. There's one less person in the house, so if anything changed, it'd be less tax, right? Unfortunately, that's not the case. So if Bill passes first, Susan will be filing single with much narrower tax brackets and a much smaller standard deduction. So let's run through some scenarios if Bill passes at age 90, starting with nothing converted. Susan Susan's first year of filing alone is at age 89. Her income drops, but the tax bill actually goes up $136,000 because she's filing single now with narrower brackets and a smaller deduction. With a custom conversion plan in place, Susan's tax that year goes way down to just $16,000. That's a huge difference. So that's why the years you've got still filing jointly are such a valuable planning window. It really sets your spouse up for success in their hardest years, right? So the good news is narrowing the second backdoor is the same move. You convert that money into a Roth IRA strategically while you're both still filing jointly. In a Roth, there are no forced withdrawals. She decides when money comes out, and as long as the Roth meets the holding requirements, it comes to her tax-free. Okay, so that's door number 2 neutralized, but there's still more taxpayer attached to that vault. Backdoor number 3 is what your kids owe when they inherit what's left. Let's say you named the kids as beneficiaries 20 years ago and you figured figured that handled the legacy part, right? Well, backdoor number 3 stays shut as long as either of you is living, but it opens wide open the day you're both gone. And most adult children who inherit a traditional IRA have to empty the whole account by the end of the 10th year. Meanwhile, in most cases, the government reaches in every year with RMDs on your heirs. Whatever gets taken out gets added right on top of their own income that year. And gosh, think about when that happens. Your kids are likely probably in their 60s or early 70s. They have their own retirement plan and plan in place, and then you come along and you drop a huge tax consequence on those plans. So some people say, well, they'll be happy to get whatever they get. My response is, yes, but if you planned ahead, you would give it to your kids instead of the government. You're dumping a huge income tax bomb on top of them, and what was supposed to be a blessing now gets feeling a whole lot more like a curse. So the question to ask is a simple one. Are my kids likely to inherit that traditional IRA during their biggest earning years or their retirement years? Under the do-nothing plan, Bill and Susan's kids are about $1.2 million in tax on what they inherit, and that's best-case scenario. Under a custom conversion plan, that drops to about $108,000. So that same conversion plan works for your kids too. The less sitting in that traditional IRA when they inherit it, the less tax they're going to owe. So there's really one move and only one move that's going to take care of all 3 backdoors. The whole game is moving the money out on a smart schedule instead of the government's. So first of all, just go check out that RMD calculator. See if conversions will help your family keep hundreds of thousands of dollars. And if so, the next question is how to pay the tax on a conversion the smart way. That's what I cover in this video right here, including why the source of that tax payment can make such a difference. So go watch that one next. I'll see you over there.
