The rise in tax rates is why I decided to roll over my 401k to a Roth IRA. I don’t want to be 59 and paying taxes on withdrawals from my retirement account.
Pre-tax contributions can help lower income taxes during your working years, while after-tax contributions can reduce your tax burden in retirement. Both have their advantages, but it’s also smart to save outside traditional retirement plans, such as individual investment accounts or with guidance from a financial advisor.
I completely agree. I'm in my mid-40s, getting closer to retirement, with over $2 million in non-retirement funds. I'm debt-free and hold relatively little in my retirement accounts compared to my total portfolio over the last three years. Honestly, you can't ignore the value of a good financial advisor-just make sure to do your homework and find a trustworthy fiduciary.
Rebecca Lynne Buie has consistently been my top recommendation. She’s widely recognized for her expertise in financial markets and has a strong track record. I highly recommend her.
Rebecca Lynne Buie appears to be a well-regarded expert in her field. I looked her up online and found her website, which provided detailed information about her credentials, education, and experience.
Paul, as someone who is familiar with the twists and turns of retirement rules, this is an outstanding summation! I was not aware of the nine month disclaimer, thank you. Two things I would add: 1) owner should evaluate personal tax consequences with that of heirs and move funds under her own tax rate which might be lower 2) owner should advise heirs to take annual distributions and use that as salary while maximizing every dollar in their own 401 and IRA since, at one time a few years ago, the rules changed and allowed worker to select to put 100 percent of salary into 401 as long as the annual cap was not exceeded. Then cap out IRA as well. All of that assumes the heirs retirement accounts were not being maxed before the inheritance as is the case with my heirs....let me add that this change in distribution retirement rules in the Secures act is just another policy shift that hurts the little guys most and impedes lower to middle classes from building wealth. I just hope my life gives me enough time to reduce consequences for my heirs. .... retirement rules are too convoluted and shows the corruption of our leaders.
I've watched a lot of your videos over the last couple of years, Paul, and they are uniformly excellent. The content of this one is is really top notch. Thanks for the great value you provide to your viewers.
For advisors who see the bigger picture (like myself), advising the spouse to disclaim part of the IRA for the kid's benefit and then explaining why to the kids... gives you a really good chance of earning the kid's business! You do well by doing what's right.
Ross…You’re absolutely correct. Too bad people line their pockets with small change where if you just do the right thing, people will see you’re honesty and you will acquire a larger following.
I was planning to use the same strategy for my TSP (401k) account. While I don't HAVE to take distributions until 72, I'll take some out between 60-72 up to the point of the next marginal tax bracket. I'll pay the lowest possible in taxes and then I can invest it in something similar. Moving it from pre-tax bucket to post tax bucket. Don't want to waste the space in my lower bracket. Playing with my spreadsheet made me see while I love to hold on and not spend, doing that will make me have huge payouts in my later years. Why 'starve' myself when I'm younger and have good health. Merry Christmas everyone.
That's exactly what I have planned as well. I also give kids $6k to their Roth IRA account each year as gift. They can invest as they wish. By the time they are 59.5 year old, they can withdrawal from the Roth IRA without paying taxes.
@@souyang1 I'd like to hang out with you. I've also been funding my teenager's Roth for a couple of years. I'll be long gone but by the time they're 60, they should be in great shape.
You might want to consider rolling over the withdrawals from age 60-72 to a Roth IRA as your post tax bucket. Everything grows tax free and no RMD required.
@@jimf710 There are limits on Roth contributions, but there is no $ limit or age limit on Roth conversions (moving money from a 401K/IRA to a Roth IRA).
I really enjoy all your very informative videos, you are absolutely making all the confusing estate planning events a whole lot more understandable. There’s so much to learn, I am amazed at how you are able to to keep it all organized and explain it in a simple fashion to all of us that are not as gifted as you are. OUTSTANDING WORK.. thank you.
I take issue with a lot of financial videos on TH-cam, as so many are either misleading or give incomplete information. This one was excellent. How about this as a modification to the recommendations in the video: start to convert money from Traditional IRA to Roth IRA, as much as you can afford while still living. Then set the primary beneficiary of the Traditional IRA to your kids, and the primary beneficiary of the Roth IRA to your spouse. The spouse thus gets the money he/she needs to live on, but it's tax free forever, and the kids receive taxable money that they can liquidate over 10 years.
Excellent and very timely presentation Paul. I've sent a copy of it to my wife for her to watch and then we'll discuss the path forward. FYI my estate attorney has never mentioned this to us. Thanks again.
As a financial adviser, I absolutely agree that there's an inherent conflict of interest that will test the integrity of the widow's adviser that many will sadly fail. An adviser who is knowledgeable and takes their fiduciary responsibility to put clients' interests ahead of their own seriously should not hesitate to explain this. But I fear many won't and many advisers, also, do not have licences that require them to put the interests of clients ahead of their own. Their licenses are basically to peddle financial products and investments that are merely "suitable" which is a far lower ethical requirement than having a fiduciary responsibility. Bottom line: Be informed; have family discussions; and don't leave this up to others because they are too frequently uninformed or unprincipled (even if you regard them as a family friend).
Thank you sir. This video is extremely relevant to our family. I had to watch it twice to “get it”, but what valuable advice. Literally - valuable. Thank you for the service you are providing to those of us untrained in these matters! You rock!
Christine should buy a vacation home between where all 4 children live, and help pay airfare to see her kids multiple times a year. It’s crazy to put it all in accounts. Enjoy that money, enjoy your family, and have a vacation home that is gaining value. It’s not all about Money!
Thank You. Your point about inherited money benefitting the heirs is the primary goal in my mind. I call it investing in my children. I take more IRA distribution now (at age 68) such that I can gift money to my responsible children; reducing their money worries in mid life. I encourage them to make investments so that they can be comfortable in their retirement. Your presentations are very good, and thought provoking!
Very informative, and a lot to think about. As the two of us each has plenty to live on, I’m going to seriously look at adjustment to our beneficiaries.
Paul, thank you so much for this video with such valuable information that I was never made aware of. This is one of your very best. You explained and illustrated everything as clear and thorough as always. Take care.
Excellent coverage of topic. My wife and I each have sizable IRA's and earlier this year we set up beneficiary 40/40/20 split between our two sons and the surviving spouse, though I'm thinking of reducing sons' percentage on my IRA - the larger one because it still might push sons into an uncomfortable tax bracket. Of course it's worth reminding people they can still take IRA distribution and/or convert to Roth during years to max out a lower tax bracket - especially after start of retirement and before starting Social Security. Also, free to gift up to $15,000 to each child (or anyone else) each year.
THANK YOU SO VERY MUCH for your informative videos. After learning about the potential for disclaiming an inherited IRA I spoke for our mutual fund estate group and learned how very simple it is to accomplish this! Nine months from the date of death to disclaim. Spouse send simple statement to the mutual fund company. Account can then be transferred to the contingent beneficiary/beneficiaries. More complicated if contingent beneficiary is not named.
Great video. This is why having too much money without spreading it out can really hurt your kids since the law changed to 10 years before having to start withdrawals can really penalize you with the highest tax rate.
Hi Paul. I have been a long time subscriber and wanted to express my appreciation for all the valuable content! I watch each time you provide new content. Thank you so much! Your information is very educational and informative. This is my first comment and am doing so to wish you and your family Happy Holidays! Rod from Myrtle Beach, SC
thanks for all your videos; i wish you practice in my state; i would be the first one when you open the door. To me, you are honest and someone i would feel comfortable entrusting with my estate planning
Paul, geat videos. Really like them. On your two hypothetical where you have the deceased husband's 2m IRA rollover into the Wife's 600k IRA on death and then the whole 2.6 million passes to the 4 children v. wife disclaiming 80% of husband's--don't you start comparing apples to oranges because you have the kids taking annual withdrawals in the lower tax bracket whereas you didn't have Wife do that. In the first scenario, If you had wife withdraw annually for 15 years and then had the kids withdraw annually for 10 years, I think you'd find it just as tax frugal and much more to the benefit of wife and kids. The whole point of having money is enjoying what you can do with it, not just avoiding taxes. For example, let's say wife doesn't need husband's 2m but pulls it out and buys a vacation home for her and the kids in Lake Tahoe, CA. Well, over 15 years that vacation home is going to double or triple in value (compared to 5% return in the IRA) and they can enjoy it and create priceless memories in Lake Tahoe and when mom passes, the kids get a stepped up basis.
Generational wealth planning is going to be the planning model of the future I believe. People will need the wealth of a family unit to survive - going alone in the future will be more and more difficult based on our current trajectory.
This is excellent, forward-thinking advice, clearly explained. One wonders whether even 5% of the families who fall in this situation even consider such a smart strategy?
@RabaIais Estate PIanning LLC° I’m not clear on the meaning of this response? (The question in my comment was rhetorical - as in - this is excellent advice where likely very few families even realize what they do not know and what they are missing!). Thanks again. I have shared your video with multiple friends.
Mom passed away in 2019 with a large traditional ira. Dad was alive. We decided to make my brother and sister and me beneficiaries of mom’s ira. Dad does didn’t need it. Our inherited iras from mom are under the old rules. Dad died in 2021 with a traditional ira. Me, my brother and sister inherited dad’s ira. I was thinking of waiting until the 10 years before taking anything out. Maybe we should take out in 10 payments. Mom and dad both had large taxable brokerage accounts. We got all this money with a stepped up cost basis. No taxes. All this makes me think you shouldn’t put money in traditional ira. It’s full of traps.
Another option: The wife can keep the deceased husband's money separate from her IRA, in a separate IRA. She can then take withdraws out of this, in larger sums, and then distribute the money to the children if she wants. She is likely in a lower tax bracket than the kids, since she is retired- further saving more money in taxes. When she dies, it will then transfer to the kids, and they can take out 1/10th per year, over 10 years. This allows the wife to keep full control over the money, in case things change and she later needs it, and it lowers the tax bill on everyone. It also delays the 10 year clock, since that does not start when it is inherited by the spouse, but it would start 15 years later, in this scenario, when the kids inherit it from mom. Thus giving a total of 25 years to take withdraw the money, instead of only 10 years.
@joseph roberts I laughed when I read that because she’s retired she’s probably in a lower tax bracket. I’m retired, and having to take the annual RMD from my IRA account and add it to my pension to determine my taxable income. I saved the max and invested it well. Now I’m in the very highest tax bracket. That never happened in my entire working life. My pension is half what my salary was, but I’m paying nearly 40% Federal tax on it. Plus California.
I’ve been binge watching your videos over the Christmas break as my wife and I are trying to sort our estate stuff for our son. Thank you so much as they are a great help. For this specific video you might try also having a shorter edit with some business graphics as your user stories might benefit? But again thank you so much. 👏🏻
Another very good presentation. This works out best when there is a 10 yr separation between the death of the married couple. Of course the surviving spouse needs to feel comfortable with giving up the bulk of Bob's IRA. If the kids are smart and disciplined, they will draw the inherited IRA over the 10 yr with tax consequences in mind. I am designating our trust as the beneficiary. That way the assets can be divided up in the trust with charity drawing from the high tax IRA, the kids drawing a combination of IRA, after tax assets, and finally Roth IRA.
I just watched "scenario 1" from this video happen to my GF's father's estate! We had the help of 2 CPA's, an attorney versed in estate planning and (to a very limited extent) a fiduciary financial planner...NOBODY said boo about the smarter "scenario 2" referred to in this video. What a shame!
The content of this video and your channel is pure gold. Thank you so much. This is the exact education I needed. You're so correct people always advise you to speak to an accountant or financial advisor but this is beyond their scope of work or duties. Thanks for being the financial friend we need to guide us.
Interesting. Though I wonder which method results in the most net income after tax. Tax free growth on the principle for 10 years is significant. But so is 39% tax. Regardless this is worth considering.
If I calculated correctly from what you said, after taxes the kids would each get about $871,000 doing the traditional route but only $684,000 if the family followed your advice with disclaiming the inheritance. Nobody should care what the taxes amount to. The only thing that matters is what is left over. If you have more left over by a strategy where you pay more taxes, follow that strategy. The big difference in this story is that the kids get a little bit of money at a time rather than a big chunk when they are near their retirement age. It would depend on the situation for which is better. I think many kids would squander the extra cash away and not have any life improvement to show for it but for some it could be a great thing. Thank you for pointing out this option but it is certainly not the best option for everyone or maybe even most.
Excellent, Paul. The one scenario you didn't cover is where Bob and Christine create "The Bob & Christine Family Trust," and then they each name that trust as the primary designated beneficiary of each of their IRA's. But, if I follow your example, that is less desirable because by the time the kids get it, the combined IRA's would be worth ~$5M and each kid would get about ~$1.25M. So even if they take only 10% each year, that's ~$125K, which means they can only make another $23K more for the year before being bumped up into the 24% tax bracket on all of that year's earnings. Did I get that right?
The IRS is now requiring annual RMD's for inherited IRA's that fall under the 10 year rule. No option to wait until year 10. ROTH IRA's have no RMD but must be drained by year 10. The spouse is exempt from the10 year requirement. Beneficiaries who inherited an IRA prior to 2020 are grandfathered and can use stretch rules.
What about the taxes paid each of the 10 years, on the now taxable investments each child took? The 10% withdrawn each year would then be invested and any gains would be taxable.
The assumption is that the children under the second assumption reinvest the lesser taxed amount. They are forgoing tax free compounding for the ten year time period. The end result is very similar. If they need the money prior to the ten year term this doesn’t apply
It is not "tax free compounding" it is tax deferred and that is why it is "sometimes" better to take the money out gradually to not go into the next tax bracket rather than take it out all at one time where it most likely will put you into the next or even higher tax bracket.
Thumb up! I subscribed!!! Very informative and Thank you so much! Can you also please make the video about Roth IRA with the same situation? I understand that Roth IRA is non-tax. But how long spouse / children (inherited) can keep the account and any recommendation ? -Thank you so much!
Thank you Paul! Another very informative video!! I'd already figured out the benefit of Scenario #2 but I'm having problems understanding how to set up beneficiaries for an IRA. Rather than naming beneficiaries directly in my IRA, I'd like to create a Conduit Trust within my main Trust as the IRA beneficiary and leave very specific instructions in my trust on how I want the IRA distributed. Can you offer any advice? For example: The Conduit Trust is named as beneficiary of the IRA I want the IRA to be distributed in 10 equal, annual amounts to the Conduit Trust. I will have each of my two children and four grandchildren identified as beneficiaries in my Trust each with a specific percentage of assets defined I want each of the 6 family members to receive their % of the annual IRA distributions in 12 equal amounts. (monthly) Will each beneficiary need a Conduit Trust of their own? Will each monthly disbursement have taxes withheld? What will be the tax rate of each monthly disbursement?
If they inherited a Roth IRA, there is no tax on the distribution but they will still have to take it all out in the 10 years. Since it is a Roth without taxes, I would let it build up tax free inside the Roth and take it out at the end of 10 years rather than take it out annually. As you alluded to if you convert the IRA to the Roth yourself - you would pay the taxes as ordinary income at your tax bracket so it would be good to only convert enough to not put you into the next tax bracket but even if you missed by a little bit, the income tax bracket is progressive so only that amount that goes into the higher bracket is taxed at that rate. But be careful about the increase IRMAA and possible NIIT if you have high income or investment gains!
If the inherited 401K contains appreciated company stock then the children should consider executing an NUA on the disclaimed amount and pay capital gains tax instead of ordinary income taxes.
Really interesting topic, of course none of us know the future tax changes by the Congress or Wash Admin. But, interesting - I suspect many spouses will not have any clue what to do and will just have the money flow based on how the decease spouse set things up. At this time in the living spouse life the mental understanding of some of these complex financial decisions may not be possible. Maybe the first spouse should leave written instructions, but obviously tax law can change and there will probably not be anyone that has the understanding to make a revision in the original plan or thinking from the spouse that pass away.
When Christine disclaimed the $2m inheritance, and if Christine also filed IRS Form 706, when Christine dies, would the total estate benefit from a reduction of $2m and still have Bob’s full estate exemption added to hers when calculating estate taxes then?
Mr. Paul, Your information is top notch. You present the facts without any emotion. I like that. I'm from the Midwest, Chicago area. I know there are slight differences from one state to the next. Does this information apply to the entire U.S.A.? Anything else I should know regarding this subject. Thank you in advance.
More of a tax/Roth IRA question. If my nephews and nieces have a 401k (or 451) and contribute also the full annual amount to an IRA, can I gift them the 15k limit and put $6500 it into another IRA for them or is does the annual limit apply and they cannot contribute to an IRA with me doing it for them? Can I contribute to a ROTH while they contribute to a traditional IRA for a total of $13,000or does the annual contribution limit of $6500 apply for a combined IRA and ROTH accounts? Excellent video. I have subscribed.
Aren't traditional IRAs, 401Ks, TSPs, etc inherited by children, grandchildren, or others protected by Federal estate laws, assuming the inheretence is under the estate limit?
Thus, in general income deferrals is costly in tax. Am I right? In addition to 401k, I also have executive deferral. By delaying income, I will subject to higher tax
I’m a new viewer/subscriber, Excellent information and clearly presented. Wondering about disclaiming if the primary beneficiary is a trust can the ira still be disclaimed to children/contingent beneficiaries?
Would you recommendation change if the amount of the IRA was significantly higher and the beneficiaries were already making high income salaries on their own? And the number of beneficiaries was less? Understanding you would still want to avoid the ten year lump sum I’m more asking about the distributions. Thanks for the great videos very helpful to all that view.
If you let kids take 10% each year for 10 years they pay lower income tax rate, I agree. But, if yo leave money there for 10 years and take all amount out at the end when money needs to be withdrawn, tax rate will be higher but don't forget that during 10 years the account increases a lot due to dividend and stocks appreciated. Take this into consideration, % increase vs tax rate paid to irs is something that remains to be seen. It is a gamble.
Any opportunity for wife to use distributions of husbands spousal IRA to fund an ILIT using a life contract with chronic care benefits to further protect from high cost of long term care and pass the tax scrubbed dollars though tax free life insurance proceeds and simultaneously protect from potential estate taxes if she should exceed the threshold or if future tax laws Change or revert to old estate tax levels? So, diffuse the IRA tax time bomb, create all future tax free dollars, protect from long term care costs and avoid estate taxes if estate taxes should crawl back down.
Please do a Part 2 of this video showing numbers. Does the overall tax savings for the child (by taking 10% distributions each yr) take into account the growth of the inherited IRA over 10 yrs?
According to my numbers this strategy assumes the children are investing the money and are not touching the returns or principal (except to pay taxes on the investment returns). In that case the children end up with more cash in their pockets. That’s pretty cool. If however, they are spenders, then this is a losing strategy. They are much better off paying the one time tax then taking the withdrawals. That is from a strictly total pile of cash standpoint. If they invest then gain roughly $300k. If they don’t invest they lose roughly $1 million. Those rough figures are after taxes of course.
@@HonoredSmoke No, because taxes are deferred on contributions to IRAs (up to a yearly limit). Those taxes are deferred, not eliminated. Taxes are due when the funds are withdrawn from the IRA and are taxed as ordinary income, as they would have been if not invested in the IRA in the first place. Further, any investment gains within the IRA are also taxed as ordinary income instead of the lower capital gains rates for the same investments that are not in an IRA.
@@billwang4181 Understood, but if the children do not invest the money the overall total cash received after taxes in this scenario is lower by a considerable amount. Think of it this way. Which would you rather receive: 1 million @ a 20% tax rate or 3 million @ 66% tax rate? Answer: the 3 million is worth over 1 million where as the one million is worth only 800 thousand. The same thing is happening here. The two million compounds for 25 years. That minus taxes is greater than the two million pulled over 10 years with compounding interest. However, If the children invest the cash when they pull the funds then the withdrawal over ten years is better even if you assume the investments returns are taxed every year. This is from a total cash on hand after taxes perspective at the 25 year mark. If the goal is to just lower the tax bill then pulling 1/10 over 10 years is best. If the goal is the largest possible pile of cash for a spender then the lump sum after 25 years is better.
@@HonoredSmoke I was actually trying to respond to another post where the question was whether the IRA fell under federal estate tax rules. Sorry about the confusion, but thanks for replying anyway. If IRAs did come under the estate tax exclusion (but they don't), then the whole discussion is moot except for very large estates. I had the same question also about total net gain, so thanks for doing the math.
Great information but cant relate because I dont have a million dollar IRA. Can you provide information regarding federal taxes on much smaller IRA? Does your advice hold true with much lower amounts?
To expand on Needs More Toys' comment...If each child withdrew from the IRA 40K @ 24% tax, at the end of tens yrs they would have netted $30,400x10= $304,000. If they kept the 400K in the IRA for ten yrs at a compounded 5% (quite possible in a SDIRA), at the end of the ten yrs they would net $393,541 after a 39.6% tax on $651,558.
Paul, A question about Annuities and nursing care expenses. If the annuity is lifetime for both husband and wife and one of them needs to go into a nursing home, how much of the annuity income will the government require to go towards the nursing home expenses...provided there are no other qualifying assets.
Paul, For a future video, under what circumstances are TOD's/POD's/house, car, etc., beneficiary deeds (in applicable states), etc., preferable to trusts, or not preferable at all?
Can the non-spousal inheritance potentially be spread over 11 tax years? Suppose I die July 1, 2051. My two sons inherit large portion of my IRA and can take 1st distribution in second half of 2051. They take further distributions in years 2052-2060. And an 11th final distribution in the first half of 2061? Still within 10 years, right?
The rise in tax rates is why I decided to roll over my 401k to a Roth IRA. I don’t want to be 59 and paying taxes on withdrawals from my retirement account.
Pre-tax contributions can help lower income taxes during your working years, while after-tax contributions can reduce your tax burden in retirement. Both have their advantages, but it’s also smart to save outside traditional retirement plans, such as individual investment accounts or with guidance from a financial advisor.
I completely agree. I'm in my mid-40s, getting closer to retirement, with over $2 million in non-retirement funds. I'm debt-free and hold relatively little in my retirement accounts compared to my total portfolio over the last three years. Honestly, you can't ignore the value of a good financial advisor-just make sure to do your homework and find a trustworthy fiduciary.
This is the direction I want to take with my finances as I prepare for retirement. Can you recommend the advisor who helped you get ahead?
Rebecca Lynne Buie has consistently been my top recommendation. She’s widely recognized for her expertise in financial markets and has a strong track record. I highly recommend her.
Rebecca Lynne Buie appears to be a well-regarded expert in her field. I looked her up online and found her website, which provided detailed information about her credentials, education, and experience.
The problem is that almost nobody has “four responsible adult children”.
Paul, as someone who is familiar with the twists and turns of retirement rules, this is an outstanding summation! I was not aware of the nine month disclaimer, thank you. Two things I would add: 1) owner should evaluate personal tax consequences with that of heirs and move funds under her own tax rate which might be lower 2) owner should advise heirs to take annual distributions and use that as salary while maximizing every dollar in their own 401 and IRA since, at one time a few years ago, the rules changed and allowed worker to select to put 100 percent of salary into 401 as long as the annual cap was not exceeded. Then cap out IRA as well. All of that assumes the heirs retirement accounts were not being maxed before the inheritance as is the case with my heirs....let me add that this change in distribution retirement rules in the Secures act is just another policy shift that hurts the little guys most and impedes lower to middle classes from building wealth. I just hope my life gives me enough time to reduce consequences for my heirs. .... retirement rules are too convoluted and shows the corruption of our leaders.
I've watched a lot of your videos over the last couple of years, Paul, and they are uniformly excellent. The content of this one is is really top notch. Thanks for the great value you provide to your viewers.
Wow, thanks
One of the very best you’ve taught
Can i have a contact phone #? I am 85 y.0. Abd i need to talk to someone about estate planning@@americasestateplanninglawy1946
For advisors who see the bigger picture (like myself), advising the spouse to disclaim part of the IRA for the kid's benefit and then explaining why to the kids... gives you a really good chance of earning the kid's business! You do well by doing what's right.
Ross…You’re absolutely correct. Too bad people line their pockets with small change where if you just do the right thing, people will see you’re honesty and you will acquire a larger following.
I was planning to use the same strategy for my TSP (401k) account. While I don't HAVE to take distributions until 72, I'll take some out between 60-72 up to the point of the next marginal tax bracket. I'll pay the lowest possible in taxes and then I can invest it in something similar. Moving it from pre-tax bucket to post tax bucket. Don't want to waste the space in my lower bracket. Playing with my spreadsheet made me see while I love to hold on and not spend, doing that will make me have huge payouts in my later years. Why 'starve' myself when I'm younger and have good health. Merry Christmas everyone.
That's exactly what I have planned as well. I also give kids $6k to their Roth IRA account each year as gift. They can invest as they wish. By the time they are 59.5 year old, they can withdrawal from the Roth IRA without paying taxes.
@@souyang1 I'd like to hang out with you. I've also been funding my teenager's Roth for a couple of years. I'll be long gone but by the time they're 60, they should be in great shape.
You might want to consider rolling over the withdrawals from age 60-72 to a Roth IRA as your post tax bucket. Everything grows tax free and no RMD required.
@@tomgrimmer947 Thanks for the thought. I was already maxing out my Roth.
@@jimf710 There are limits on Roth contributions, but there is no $ limit or age limit on Roth conversions (moving money from a 401K/IRA to a Roth IRA).
I really enjoy all your very informative videos, you are absolutely making all the confusing estate planning events a whole lot more understandable. There’s so much to learn, I am amazed at how you are able to to keep it all organized and explain it in a simple fashion to all of us that are not as gifted as you are.
OUTSTANDING WORK.. thank you.
Informative clear explanation in 19 minutes in 1 take no editing!
I take issue with a lot of financial videos on TH-cam, as so many are either misleading or give incomplete information. This one was excellent.
How about this as a modification to the recommendations in the video: start to convert money from Traditional IRA to Roth IRA, as much as you can afford while still living. Then set the primary beneficiary of the Traditional IRA to your kids, and the primary beneficiary of the Roth IRA to your spouse. The spouse thus gets the money he/she needs to live on, but it's tax free forever, and the kids receive taxable money that they can liquidate over 10 years.
Excellent and very timely presentation Paul. I've sent a copy of it to my wife for her to watch and then we'll discuss the path forward. FYI my estate attorney has never mentioned this to us. Thanks again.
As a financial adviser, I absolutely agree that there's an inherent conflict of interest that will test the integrity of the widow's adviser that many will sadly fail. An adviser who is knowledgeable and takes their fiduciary responsibility to put clients' interests ahead of their own seriously should not hesitate to explain this. But I fear many won't and many advisers, also, do not have licences that require them to put the interests of clients ahead of their own. Their licenses are basically to peddle financial products and investments that are merely "suitable" which is a far lower ethical requirement than having a fiduciary responsibility.
Bottom line: Be informed; have family discussions; and don't leave this up to others because they are too frequently uninformed or unprincipled (even if you regard them as a family friend).
Thank you sir. This video is extremely relevant to our family. I had to watch it twice to “get it”, but what valuable advice. Literally - valuable. Thank you for the service you are providing to those of us untrained in these matters! You rock!
Many thanks, Paul. This was a good one-cup-of-coffee lesson I can really use.
Christine should buy a vacation home between where all 4 children live, and help pay airfare to see her kids multiple times a year. It’s crazy to put it all in accounts. Enjoy that money, enjoy your family, and have a vacation home that is gaining value. It’s not all about Money!
Thank You. Your point about inherited money benefitting the heirs is the primary goal in my mind. I call it investing in my children. I take more IRA distribution now (at age 68) such that I can gift money to my responsible children; reducing their money worries in mid life. I encourage them to make investments so that they can be comfortable in their retirement.
Your presentations are very good, and thought provoking!
Very informative, and a lot to think about. As the two of us each has plenty to live on, I’m going to seriously look at adjustment to our beneficiaries.
Paul, thank you so much for this video with such valuable information that I was never made aware of. This is one of your very best. You explained and illustrated everything as clear and thorough as always. Take care.
Glad you enjoyed it!
Excellent coverage of topic. My wife and I each have sizable IRA's and earlier this year we set up beneficiary 40/40/20 split between our two sons and the surviving spouse, though I'm thinking of reducing sons' percentage on my IRA - the larger one because it still might push sons into an uncomfortable tax bracket. Of course it's worth reminding people they can still take IRA distribution and/or convert to Roth during years to max out a lower tax bracket - especially after start of retirement and before starting Social Security. Also, free to gift up to $15,000 to each child (or anyone else) each year.
I think it's $16k/yr now
THANK YOU SO VERY MUCH for your informative videos. After learning about the potential for disclaiming an inherited IRA I spoke for our mutual fund estate group and learned how very simple it is to accomplish this! Nine months from the date of death to disclaim. Spouse send simple statement to the mutual fund company. Account can then be transferred to the contingent beneficiary/beneficiaries. More complicated if contingent beneficiary is not named.
Nice!
Great video. This is why having too much money without spreading it out can really hurt your kids since the law changed to 10 years before having to start withdrawals can really penalize you with the highest tax rate.
Excellent discussion! Thanks so much for freely sharing your knowledge 😊
Hi Paul. I have been a long time subscriber and wanted to express my appreciation for all the valuable content! I watch each time you provide new content. Thank you so much! Your information is very educational and informative. This is my first comment and am doing so to wish you and your family Happy Holidays! Rod from Myrtle Beach, SC
Thanks Rod. That heartfelt message means so much to me.
thanks for all your videos; i wish you practice in my state; i would be the first one when you open the door. To me, you are honest and someone i would feel comfortable entrusting with my estate planning
Paul, geat videos. Really like them.
On your two hypothetical where you have the deceased husband's 2m IRA rollover into the Wife's 600k IRA on death and then the whole 2.6 million passes to the 4 children v. wife disclaiming 80% of husband's--don't you start comparing apples to oranges because you have the kids taking annual withdrawals in the lower tax bracket whereas you didn't have Wife do that. In the first scenario, If you had wife withdraw annually for 15 years and then had the kids withdraw annually for 10 years, I think you'd find it just as tax frugal and much more to the benefit of wife and kids.
The whole point of having money is enjoying what you can do with it, not just avoiding taxes. For example, let's say wife doesn't need husband's 2m but pulls it out and buys a vacation home for her and the kids in Lake Tahoe, CA. Well, over 15 years that vacation home is going to double or triple in value (compared to 5% return in the IRA) and they can enjoy it and create priceless memories in Lake Tahoe and when mom passes, the kids get a stepped up basis.
Excellent, clearly explained analysis.
I made the 3 children the beneficiaries of one of my IRAs because my wife has her own IRA and will still get another one of my IRAs.
Awesome. Thank you for the best topics.
Generational wealth planning is going to be the planning model of the future I believe. People will need the wealth of a family unit to survive - going alone in the future will be more and more difficult based on our current trajectory.
This is excellent, forward-thinking advice, clearly explained. One wonders whether even 5% of the families who fall in this situation even consider such a smart strategy?
@RabaIais Estate PIanning LLC° I’m not clear on the meaning of this response? (The question in my comment was rhetorical - as in - this is excellent advice where likely very few families even realize what they do not know and what they are missing!). Thanks again. I have shared your video with multiple friends.
Looks like I was hacked by someone who put an asterisk after LLC. I have reported it. Thanks for sharing my video BB.
@@americasestateplanninglawy1946 aha, got it. Thanks.
Oh my goodness 🤯
Mom passed away in 2019 with a large traditional ira. Dad was alive. We decided to make my brother and sister and me beneficiaries of mom’s ira. Dad does didn’t need it. Our inherited iras from mom are under the old rules. Dad died in 2021 with a traditional ira. Me, my brother and sister inherited dad’s ira. I was thinking of waiting until the 10 years before taking anything out. Maybe we should take out in 10 payments. Mom and dad both had large taxable brokerage accounts. We got all this money with a stepped up cost basis. No taxes. All this makes me think you shouldn’t put money in traditional ira. It’s full of traps.
How did you not pay taxes on it?
@@mikem6796When you inherit a non Tex sheltered brokerage account, the basis is stepped up to the value at the time of death.
One of the best estate planning videos I’ve ever seen. Thank you so much. Your message is very applicable for so many people.
Another option: The wife can keep the deceased husband's money separate from her IRA, in a separate IRA. She can then take withdraws out of this, in larger sums, and then distribute the money to the children if she wants. She is likely in a lower tax bracket than the kids, since she is retired- further saving more money in taxes. When she dies, it will then transfer to the kids, and they can take out 1/10th per year, over 10 years. This allows the wife to keep full control over the money, in case things change and she later needs it, and it lowers the tax bill on everyone. It also delays the 10 year clock, since that does not start when it is inherited by the spouse, but it would start 15 years later, in this scenario, when the kids inherit it from mom. Thus giving a total of 25 years to take withdraw the money, instead of only 10 years.
@joseph roberts I laughed when I read that because she’s retired she’s probably in a lower tax bracket. I’m retired, and having to take the annual RMD from my IRA account and add it to my pension to determine my taxable income. I saved the max and invested it well. Now I’m in the very highest tax bracket. That never happened in my entire working life. My pension is half what my salary was, but I’m paying nearly 40% Federal tax on it. Plus California.
Excellent idea.
It was amazing. I like this type of content thank you
I’ve been binge watching your videos over the Christmas break as my wife and I are trying to sort our estate stuff for our son. Thank you so much as they are a great help. For this specific video you might try also having a shorter edit with some business graphics as your user stories might benefit? But again thank you so much. 👏🏻
Another very good presentation. This works out best when there is a 10 yr separation between the death of the married couple. Of course the surviving spouse needs to feel comfortable with giving up the bulk of Bob's IRA. If the kids are smart and disciplined, they will draw the inherited IRA over the 10 yr with tax consequences in mind. I am designating our trust as the beneficiary. That way the assets can be divided up in the trust with charity drawing from the high tax IRA, the kids drawing a combination of IRA, after tax assets, and finally Roth IRA.
Time well spent. Thank you.
Wow you are top notch!! I’ve never really understood this stuff but you explain things so well!!! Thanks for making these videos sir. 😊
Thank you for valuable info.🙏❤️I shared and liked👍
Whew. I am exhausted. Now if someone will just leave the IRA to me. Very good video.
I just watched "scenario 1" from this video happen to my GF's father's estate! We had the help of 2 CPA's, an attorney versed in estate planning and (to a very limited extent) a fiduciary financial planner...NOBODY said boo about the smarter "scenario 2" referred to in this video. What a shame!
Paul is a smart dude I think our will/ testamentary trust has that spousal disclaim option.
Done. This was mind boggling, but genius. Thank you!
Wow, what a variety of comments. Thank you for being "thick-skinned" enough to persevere through it all👍
Thank for sharing your brains with us!
The content of this video and your channel is pure gold. Thank you so much. This is the exact education I needed. You're so correct people always advise you to speak to an accountant or financial advisor but this is beyond their scope of work or duties. Thanks for being the financial friend we need to guide us.
Interesting. Though I wonder which method results in the most net income after tax. Tax free growth on the principle for 10 years is significant. But so is 39% tax. Regardless this is worth considering.
$2 million at 5% growth in 10 years may be with $3.2 million!!
Excellent advice, another great video. Easy to understand and thank you for going through all the options.
Many thanks for this wonderful video! Extremely informative!
If I calculated correctly from what you said, after taxes the kids would each get about $871,000 doing the traditional route but only $684,000 if the family followed your advice with disclaiming the inheritance. Nobody should care what the taxes amount to. The only thing that matters is what is left over. If you have more left over by a strategy where you pay more taxes, follow that strategy. The big difference in this story is that the kids get a little bit of money at a time rather than a big chunk when they are near their retirement age. It would depend on the situation for which is better. I think many kids would squander the extra cash away and not have any life improvement to show for it but for some it could be a great thing.
Thank you for pointing out this option but it is certainly not the best option for everyone or maybe even most.
At 60+ years of age, I don’t think they would be referred as ‘kids’.
Paul did say “responsible adult” children.
Thank you… this is exactly my situation.
Excellent, Paul. The one scenario you didn't cover is where Bob and Christine create "The Bob & Christine Family Trust," and then they each name that trust as the primary designated beneficiary of each of their IRA's. But, if I follow your example, that is less desirable because by the time the kids get it, the combined IRA's would be worth ~$5M and each kid would get about ~$1.25M. So even if they take only 10% each year, that's ~$125K, which means they can only make another $23K more for the year before being bumped up into the 24% tax bracket on all of that year's earnings. Did I get that right?
Excellent video! Great information I had never considered before. Keep up the good work!
The IRS is now requiring annual RMD's for inherited IRA's that fall under the 10 year rule. No option to wait until year 10. ROTH IRA's have no RMD but must be drained by year 10. The spouse is exempt from the10 year requirement. Beneficiaries who inherited an IRA prior to 2020 are grandfathered and can use stretch rules.
What about the taxes paid each of the 10 years, on the now taxable investments each child took? The 10% withdrawn each year would then be invested and any gains would be taxable.
Thank you so much for putting this together is a very understandable way!
You're very welcome!
Excellent video. As always. Will definitely share
Much appreciated!
Excellent content. Thanks for sharing !!
Very informative, thanks for the information
The assumption is that the children under the second assumption reinvest the lesser taxed amount. They are forgoing tax free compounding for the ten year time period. The end result is very similar. If they need the money prior to the ten year term this doesn’t apply
It is not "tax free compounding" it is tax deferred and that is why it is "sometimes" better to take the money out gradually to not go into the next tax bracket rather than take it out all at one time where it most likely will put you into the next or even higher tax bracket.
Thumb up! I subscribed!!! Very informative and Thank you so much! Can you also please make the video about Roth IRA with the same situation? I understand that Roth IRA is non-tax. But how long spouse / children (inherited) can keep the account and any recommendation ? -Thank you so much!
Thank you Paul! Another very informative video!! I'd already figured out the benefit of Scenario #2 but I'm having problems understanding how to set up beneficiaries for an IRA.
Rather than naming beneficiaries directly in my IRA, I'd like to create a Conduit Trust within my main Trust as the IRA beneficiary and leave very specific instructions in my trust on how I want the IRA distributed. Can you offer any advice?
For example:
The Conduit Trust is named as beneficiary of the IRA
I want the IRA to be distributed in 10 equal, annual amounts to the Conduit Trust.
I will have each of my two children and four grandchildren identified as beneficiaries in my Trust each with a specific percentage of assets defined
I want each of the 6 family members to receive their % of the annual IRA distributions in 12 equal amounts. (monthly)
Will each beneficiary need a Conduit Trust of their own?
Will each monthly disbursement have taxes withheld?
What will be the tax rate of each monthly disbursement?
Never thought of doing this.
Plz comment on -/what about if we convert the traditional IRA to ROTH gradually, what will be the tax consequences to the children after our passing?
If they inherited a Roth IRA, there is no tax on the distribution but they will still have to take it all out in the 10 years. Since it is a Roth without taxes, I would let it build up tax free inside the Roth and take it out at the end of 10 years rather than take it out annually. As you alluded to if you convert the IRA to the Roth yourself - you would pay the taxes as ordinary income at your tax bracket so it would be good to only convert enough to not put you into the next tax bracket but even if you missed by a little bit, the income tax bracket is progressive so only that amount that goes into the higher bracket is taxed at that rate. But be careful about the increase IRMAA and possible NIIT if you have high income or investment gains!
Good and valuable info presented very professionally, thanks Paul
Great information very insightful
If the inherited 401K contains appreciated company stock then the children should consider executing an NUA on the disclaimed amount and pay capital gains tax instead of ordinary income taxes.
Very informative . Thank you. Is it better to use the revocable trust as the ira beneficiary?
I'm taking notes.
Really interesting topic, of course none of us know the future tax changes by the Congress or Wash Admin. But, interesting - I suspect many spouses will not have any clue what to do and will just have the money flow based on how the decease spouse set things up. At this time in the living spouse life the mental understanding of some of these complex financial decisions may not be possible. Maybe the first spouse should leave written instructions, but obviously tax law can change and there will probably not be anyone that has the understanding to make a revision in the original plan or thinking from the spouse that pass away.
Very informational. Thank you
Do 401K's work the same?
When Christine disclaimed the $2m inheritance, and if Christine also filed IRS Form 706, when Christine dies, would the total estate benefit from a reduction of $2m and still have Bob’s full estate exemption added to hers when calculating estate taxes then?
Mr. Paul, Your information is top notch. You present the facts without any emotion. I like that. I'm from the Midwest, Chicago area. I know there are slight differences from one state to the next. Does this information apply to the entire U.S.A.? Anything else I should know regarding this subject. Thank you in advance.
More of a tax/Roth IRA question. If my nephews and nieces have a 401k (or 451) and contribute also the full annual amount to an IRA, can I gift them the 15k limit and put $6500 it into another IRA for them or is does the annual limit apply and they cannot contribute to an IRA with me doing it for them? Can I contribute to a ROTH while they contribute to a traditional IRA for a total of $13,000or does the annual contribution limit of $6500 apply for a combined IRA and ROTH accounts? Excellent video. I have subscribed.
Aren't traditional IRAs, 401Ks, TSPs, etc inherited by children, grandchildren, or others protected by Federal estate laws, assuming the inheretence is under the estate limit?
He's talking about income taxes, not estate taxes.
Anyone who has an IRA that’s large enough to incur hefty taxes needs this information.
Thank you so much for this valuable amd helpful video!
I so appreciate you!!! Thanks!!!
Knowledge is power. This video is powerful. Thanks
Thus, in general income deferrals is costly in tax. Am I right? In addition to 401k, I also have executive deferral. By delaying income, I will subject to higher tax
Great Information 👍
Glad you think so!
I’m a new viewer/subscriber, Excellent information and clearly presented. Wondering about disclaiming if the primary beneficiary is a trust can the ira still be disclaimed to children/contingent beneficiaries?
Why no mention of RMD's required to be taken from the IRA, reducing the total value of the IRA's total value over Christine's 15-years?
I guess you have to go another qualifying attorney for that 😂
Would you recommendation change if the amount of the IRA was significantly higher and the beneficiaries were already making high income salaries on their own? And the number of beneficiaries was less? Understanding you would still want to avoid the ten year lump sum I’m more asking about the distributions. Thanks for the great videos very helpful to all that view.
In your example can the wife and / or kids convert the inherited IRA to a Roth and pay taxes once but have the monies continue to grow?
Absolutely and do it gradually to avoid goin gin to a higher tax bracket
Good question
Brilliant - so much useful information; I hadn't heard of disclaiming an inherited IRA! Thanks for sharing your knowledge, Paul. 👍🏼
Wonderful!
Actually not really disclaiming an "inherited" IRA; it's a "spousal rollover IRA" which is different than an inherited IRA
What about doing a Roth conversion on the large trad 401k.
If you let kids take 10% each year for 10 years they pay lower income tax rate, I agree. But, if yo leave money there for 10 years and take all amount out at the end when money needs to be withdrawn, tax rate will be higher but don't forget that during 10 years the account increases a lot due to dividend and stocks appreciated. Take this into consideration, % increase vs tax rate paid to irs is something that remains to be seen. It is a gamble.
Isn’t it true that 10% withdrawn for kids also can be in invested and make up for the lost profit?
Now I need to seek out a Trust and Estate lawyer of which also knows tax laws. Maybe an accountant as well! 🤔
Any opportunity for wife to use distributions of husbands spousal IRA to fund an ILIT using a life contract with chronic care benefits to further protect from high cost of long term care and pass the tax scrubbed dollars though tax free life insurance proceeds and simultaneously protect from potential estate taxes if she should exceed the threshold or if future tax laws
Change or revert to old estate tax levels? So, diffuse the IRA tax time bomb, create all future tax free dollars, protect from long term care costs and avoid estate taxes if estate taxes should crawl back down.
LOL, MY mom is Christine and my dad IS bob. Maybe I need to pay attention to this.
Please do a Part 2 of this video showing numbers. Does the overall tax savings for the child (by taking 10% distributions each yr) take into account the growth of the inherited IRA over 10 yrs?
According to my numbers this strategy assumes the children are investing the money and are not touching the returns or principal (except to pay taxes on the investment returns). In that case the children end up with more cash in their pockets. That’s pretty cool. If however, they are spenders, then this is a losing strategy. They are much better off paying the one time tax then taking the withdrawals. That is from a strictly total pile of cash standpoint. If they invest then gain roughly $300k. If they don’t invest they lose roughly $1 million. Those rough figures are after taxes of course.
@@HonoredSmoke No, because taxes are deferred on contributions to IRAs (up to a yearly limit). Those taxes are deferred, not eliminated. Taxes are due when the funds are withdrawn from the IRA and are taxed as ordinary income, as they would have been if not invested in the IRA in the first place. Further, any investment gains within the IRA are also taxed as ordinary income instead of the lower capital gains rates for the same investments that are not in an IRA.
@@billwang4181 Understood, but if the children do not invest the money the overall total cash received after taxes in this scenario is lower by a considerable amount. Think of it this way. Which would you rather receive: 1 million @ a 20% tax rate or 3 million @ 66% tax rate? Answer: the 3 million is worth over 1 million where as the one million is worth only 800 thousand. The same thing is happening here. The two million compounds for 25 years. That minus taxes is greater than the two million pulled over 10 years with compounding interest. However, If the children invest the cash when they pull the funds then the withdrawal over ten years is better even if you assume the investments returns are taxed every year. This is from a total cash on hand after taxes perspective at the 25 year mark. If the goal is to just lower the tax bill then pulling 1/10 over 10 years is best. If the goal is the largest possible pile of cash for a spender then the lump sum after 25 years is better.
I will add that after the mother dies they should always pull the money out over ten years. That holds true even if they are spenders.
@@HonoredSmoke I was actually trying to respond to another post where the question was whether the IRA fell under federal estate tax rules. Sorry about the confusion, but thanks for replying anyway. If IRAs did come under the estate tax exclusion (but they don't), then the whole discussion is moot except for very large estates. I had the same question also about total net gain, so thanks for doing the math.
Great information but cant relate because I dont have a million dollar IRA. Can you provide information regarding federal taxes on much smaller IRA? Does your advice hold true with much lower amounts?
Can this conduit trust you mention be the same trust as the “cash income trust / medicaid trust” ? Or you suggest to set up two separate trusts?
To expand on Needs More Toys' comment...If each child withdrew from the IRA 40K @ 24% tax, at the end of tens yrs they would have netted $30,400x10= $304,000. If they kept the 400K in the IRA for ten yrs at a compounded 5% (quite possible in a SDIRA), at the end of the ten yrs they would net $393,541 after a 39.6% tax on $651,558.
Paul, A question about Annuities and nursing care expenses. If the annuity is lifetime for both husband and wife and one of them needs to go into a nursing home, how much of the annuity income will the government require to go towards the nursing home expenses...provided there are no other qualifying assets.
Other benefit may be that portion of IRA continues to grow in tax deferred account up to 10’years
Does the future value of the father and mother IRAs account for MRD ?
Paul, For a future video, under what circumstances are TOD's/POD's/house, car, etc., beneficiary deeds (in applicable states), etc., preferable to trusts, or not preferable at all?
Can the non-spousal inheritance potentially be spread over 11 tax years? Suppose I die July 1, 2051. My two sons inherit large portion of my IRA and can take 1st distribution in second half of 2051. They take further distributions in years 2052-2060. And an 11th final distribution in the first half of 2061? Still within 10 years, right?