Craig Wear shows how inherited traditional IRAs can trigger massive tax bills for beneficiaries. Without action, three children inherit $2.3 million each but owe $1.2 million in taxes combined. Converting to a Roth IRA while parents are alive cuts the tax bill to $108,000 and raises each child's inheritance to $2.7 million.
When your kids inherit a traditional IRA, the law gives them 10 years to empty it out. And every dollar is going to be taxable. The longer they wait, the more tax they're going to pay, theoretically, because the account's going up. But those 10 years usually land right in the middle of their own top earning years when their tax rate is the highest it'll ever be, or it lands right after they've retired and have their own game plan figured out before being handed this huge tax bill from your assets that you left to them. Doing nothing, Dave and Carol's kids owe about $1.2 million in tax On what they inherit. On our conversion plan, it's just $108,000. Now, one of those is a tax bomb and the other is an actual inheritance. So let's step back and put all the most important numbers up on the screen. Here's the do-nothing path. Each of the 3 kids ends up with about $2.3 million. And this share right here belongs to the IRS. Every dollar of tax while Dave and Carol are living, plus everything the government collects after they've gone. $2,497,000. Look at that. On the do-nothing plan, the IRS ends up with more than any one of the children does. Now here's that same family on their Rothology plan. The IRS's share drops to $552,000 and each of the kids goes from about $2.3 million to about $2.7 million. That one decision made in their early 60s moved $1,945,000 out of the government's hand and into their hands.
