Craig Wear, CFP® explains that the SECURE Act eliminated the stretch-IRA for most beneficiaries, requiring most heirs to empty inherited IRAs within 10 years. He warns this can create large, accelerated tax bills, especially if beneficiaries withdraw during peak earning years. Wear offers three quick points: (1) the 10-year rule forces accelerated taxation; (2) large IRAs can push heirs into higher tax brackets; and (3) Roth conversions during the owner’s lifetime can convert taxable IRAs into tax-free wealth for heirs. He emphasizes doing the math and strategic, accelerated conversions to potentially reduce cumulative taxes and preserve heirs’ wealth.
Chapters
Okay, so your kids could inherit your IRA and a giant tax problem at the same time. Yep. So the Secure act ended the stretch IRA that most of us were aware of for the last however many years. But now most heirs must actually empty those inherited IRAs within 10 years. So there's not a withdrawal schedule at this point. But withdrawals could happen for your heirs during their peak earning years when their own taxes are highest. So instead of leaving a legacy, a lot of parents are probably unknowingly going to leave their kids a massive tax bill. So let me give you three, just real quick tips. Number one, the ten year rule forces heirs into an accelerated tax situation. Number two, your big IRAs, if you're an IRA millionaire, often push heirs into higher tax brackets. If you leave them 4 million bucks and you got two kids, they got a couple hundred thousand dollars a year at least, not counting growth that they got to pull out. And number three, Roth conversions let them inherit tax free wealth instead of the tax problem. There's a right way and a wrong way to evaluate this, and we just believe logically and doing the math on it is what matters. But we actually see where a lot of our clients actually end up with the same or greater wealth than they would have had otherwise. But they pay the tax during their lifetime, even at a higher tax bracket, to avoid the so much more cumulative tax over their lifetime. So the bracket is really not the important thing. It's the amount of tax that has to be paid. And if you do these accelerated conversions strategically and you get it right, you actually save millions of dollars of taxes and you leave your heirs with as much or about as much as what you would have anyway. So we got all kinds of books and webinars and all that kind of thing you can check out. Love to help if we can, but just kind of be aware, it is a big deal.
