This Will Cost $200k – You Need To Do This IRA Move

Hey everyone, this is Craig Weir. Welcome back to the channel. I've got an interesting subject I'm going to run through today. Just kind of try to give you a little bit of perspective on leaving money to your kids and kind of the impact. So I want to, we want to talk about the impact on your heirs when they inherit this large ira. So we're going to break down how Roth conversions, how if you do Roth conversions ahead of time, how they impact the money for your heirs down the road. If you have a sizable ira, what's going to happen when it passes to your kids or your grandkids and that can make a big difference in their financial future and their tax bill too. So we're going to cover here in the next few minutes how Roth conversions are going to impact them, the tax advantages and kind of an eye opening example of what happens when heirs inherit a couple million dollars and then have to draw it down over 10 years. So I've got some notes here in front of me, so forgive me for not looking directly into the camera this whole time, but I want to be able to get the facts straight to you and keep my thoughts organized so I don't ramble on forever and ever. So let's just remember the differences between the IRA and the Roth, right? So to your heirs anyway, so your heirs, if they receive the inheritance in an IRA, they have to take RMDs over no longer than a 10 year period of time and every single dollar that they withdraw is taxed at ordinary income. So depending on how much is left in that Iraq, it could push them into a higher tax bracket. Especially if they inherit say in their 50s or 60s at the peak earning years or if they're already in a higher paying job, right? So in the Roth ira, if they inherit that, you're going to pay the taxes during your lifetime on kind of the balances now as opposed to later. And you're going to do it in a way that benefits you the most. They just happen to be the benefactor of that. It helped you as well. You going to lower your RMDs, you're going to lower your Medicare premiums and just overall your taxes over your lifetime. If you get these conversions done, if you're that IRA millionaire that we try to work with and talk to a lot and then at the end there's no taxes on the heirs. Withdrawals from the Roth, they get it, 100% of the money is tax free. Now they still have to withdraw the funds over a 10 year period of time. But it doesn't really impact their tax bracket. It's all tax free, other than over time, that pot of money grows and then it creates potentially capital gains, dividends, interest, all those kinds of things. But that's more complicated than what I can try to model here because we have no idea what the kids are going to do with it. Right. So that at the end of the day, there's more flexibility for the heirs if they just let the Roth continue to grow tax free before they start withdrawing it. Okay, so there's the differences between the two. So now let's just kind of look at a sample. What's the tax bite on a $2 million IRA? So let's, let's walk through this example. How much can be lost in taxes when it's inherited? So we're going to assume a parent leaves a $2 million traditional IRA and it's split between two heirs. Each heir, let's assume, has $100,000 of their own taxable income at the time that they inherit it. So I'm going to put on the screen here a visual of the different tax brackets and kind of how that impacts each one of them along the way so that you can get some idea of kind of, you know, what's going to be, how's all that going to play out for my, my heirs? Right. So the way to interpret this table that you have in front of you is that, you know, if you're, let's say you're one of your kids has got about $100,000 of taxable income before the inheritance, if you look at, at the 22% tax bracket, you can see that they can have as much as 206,000, $206,700 in taxable income before the next dollar is taxed at the 24% bracket. And if they inherited a million dollars and that account earning about 6% a year, then the first year of the required distribution, let's say they calculate out, they want to do this over 10 years, they'd take somewhere around $106,000. So they'd be able to probably pay just 24% tax on everything. If there is income was at $100,000 before it started, hopefully that made sense to you. Fits a little bit too numbersy. Just all you need to know is probably they're going to pay at least the 22% bracket. But if you got kids that are making more money, they're probably going to pay it 24 or 32%. I just wanted to kind of show you how the brackets work and so you can get some idea of, you know, how that would impact them. And we are going to assume through this that the balance is going to continue to grow at 6% each year during the time that they're actually doing withdrawals. And we want to also assume that each of the heirs withdraw an amount of the remaining balance of their share of the IRA each year in order to meet that 10 year limitation. So the way I did that is I just said, okay, in the first year they're going to take out 1:10. The second year they're going to have earnings and they're going to take out 1/9 and then 1/8 and 1/7. You can see how it goes. And we're going to also assume that they pay the tax on the distribution from the Iraq. So we're assuming they don't have any money outside there that they want to use for taxes. They're just going to use mom and dad's money to pay the taxes on the taxes. Bottom line on that, each of the heirs, if there's two, like we're assuming each of the heirs is going to end up with a total balance of about $780,000 by the time this 10 years is gone, they would have had $780,000 of distributions over that period of time. And the cumulative balance of that 780,000 again at a 6% rate of return is about $1,100,000. Now that did not include taxes from the gains. They're going to have about a million one sitting there in the account from the distributions of 780,000. The total taxes that they're going to pay over those 10 years to pull that million dollars out is going to be about $231,000. So, so in total for two heirs, that's about $463,000 is going to get paid in taxes over that 10 year period of time. And that balance is about 2.3 million if we count both of them. And then of course now it's someplace in an account where they maybe are having to pay taxes and capital gains and everything else on it at the end of that 10 years. So the total balance is going to be nice. But let's look at the the other side of that. The benefits of converting to a Roth for the heirs. So let's say you had that same amount of money that would have generated the 2 million, but now you want to turn it into a tax free inheritance. So at the end of your life, the kids now get a $2 million, IRA, Roth IRA. And it remains tax free. If they invest it at 6%, well, that 2 million in just 12 years becomes 4 million. And I use 12 because I can do the math in my head pretty easy on it, just using some basic financial stuff. So 2 million becomes 4 million in 12 years versus 2 million becoming like 2.3 million over a 10 year period of time because of all the taxes. So if you convert it to the Roth, there's no messing with the taxes and doing all the calculations each year. The kids don't have to worry about tax bracket creep. It's going to take me over the 22, put me in 24. And they can just take money out without pushing themselves into higher brackets for whatever they want to use. And they're going to do no differently than you. You know, when you wanted the new vehicle or you wanted to go take a trip, you probably looked at the cost of the taxes as opposed to taking out of the IRA after you retired. Right. So we want to put them in a position where they have a lot of flexibility. And it also is going to minimize the risk of the changes in tax laws once you get the money on your own to a Roth, certainly Congress can do anything they decide to do, but the risk of them going in and totally changing that is significantly lower. And there's a bigger risk that rates go up. Right. The other thing is you'll be able to maximize growth. If they wait to dig into that Roth, they've got up to 10 years to just let it grow. They can continue to get that compounding totally tax free before they start withdrawing it. And obviously what we're trying to do for everybody is create more peace of mind. You control the tax bill now at the present value of the account rather than leaving that future big surprise for the heirs to deal with all the taxes along the way. So a lot of people kind of take the opinion, well, I don't really care about the heirs. If there's anything left, then that's fine, they get it all for free. Yeah, and I understand that. But at the same time, if you could do a little bit of planning and they get more and you end up with a better situation and the IRS gets less, that's probably a win win for both of you. And it makes it work out really well. A couple of just real quick action steps. Number one, just assess your situation. Work with a financial planner that really specializes in this stuff, perhaps one of our CFPs on staff, because they are specialists in this, maybe they can help you. But you want to work with somebody that really understands it and does a lot of it. Most planners don't have the number of clients that we get to see coming through. So their opportun set isn't just as great. They haven't done as many. They maybe will do in a year what we, what one of our advisors does in a month, you know, and just see if, if Roth conversion makes sense for you and for your heirs. You know, if you knew you were both going to die immediately, well, you'd be better off not to convert anything and, or to pay any tax in advance, just leave them with all the money. But you know, with just a little bit of growth over the rest of your life and your spouse's life, you're going to be better off during your lifetime for the benefits of the conversion. And you're going to also just minimize the tax that you, that somebody has to give the IRS after you're gone. Another takeaway is just consider using a multi year conversion strategy. So instead of just converting all at once and just ripping off the band aid most of the time, it's better off to just spread it out over several years. It's typically not 12 or 15 years. It's typically four to eight or nine years is kind of normally what we see happening. So I guess a final thought would be, you know, Roth conversions can be a really powerful tool, but the conversion game plan is not at all a one size fits all. The key is really planning ahead so that you and your heirs get the most out of what you worked 30, 40 years to accumulate. So if the video is helpful, hit the like button. We'd love it if you subscribe when this kind of stuff comes out. If you have any questions, drop them in the comments. Love to hear from you. Some of this was kind of numbersy, so it may be a little bit confusing, but hopefully it'll make a little bit more sense. If not, just ask some questions. We'll see if we can help out. Hope this was great for you. Take care. God bless.