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.
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.
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!
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).
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.
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.
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.
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
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).
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!
I take issue with a lot of financial videos on RU-vid, 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.
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.
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.
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 much for sharing this content with your viewers. I liked, subscribed and shared this video. An idea came to me as I was listening to you: have the wife inherit the $2M IRA, take the RMD, gift each adult child and grandchild $15,000 to help them out if they need it, or reinvest the RMD back to an investment account if the adult children don’t need the extra help, then upon her death, set up a trust as the beneficiary of her IRA and the investment account mentioned above, name the 4 children as the beneficiaries of the trust and structure the trust so that each child takes advantage of the 10 year rule for the IRA RMD of her IRA. I wonder if this would work. I’m not a financial planner, but I’m a tax accountant.
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!
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.
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.
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?
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!
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.
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?
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?
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
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.
We're in between 22% vs 24% tax brackets. I have to max out TSP traditional to stay in 22% tax. Should i just pay 24% and contribute 100% to Roth TSP? Thanks
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. 👏🏻
OUT OF DATE!! The IRS has changed the SECURE Act rules to require non-spouse beneficiaries to make annual distributions from inherited accounts instead of waiting to year 10. Of course, this is so confusing that as of 2024, it hasn’t been enforced yet. Check for updates, folks. Even if the person making the video is a financial professional, they can’t report what hasn’t happened yet.
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!
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.
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?
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.
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
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.
Excellent videos that are quite informative. My only request is when reporting numbers like the scenario described in this video, there is no need to report numbers to the dollar. Instead of saying the IRA is worth 5 million, 405 thousand, 213 dollars, you could simply say 5.4 million. By mentioning numbers to the dollars, you drown your audience with unnecessary details. You can round numbers in a way that gets the message across with these mouth full of details.
Still confused as to the 5 year rule and the 10 year rule... My Dad passed away this year, had his Trust as the beneficiary of his IRA. We were told by Fidelity after creating Inherited IRAs that we must withdraw all within 5 years??
Paul, in spite of your excellent presentation, you'd better think about how many people would have their retirement $$ in millions, if not billions, especially if you want to jack up your youtube follower numbers in millions. Many ordinary people simply do not belong to your content premise😂
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.
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?
If Christine died at 79, she would've been required to make regulated minimal withdrawals from her IRA starting at age 72, so her balance at her death 7 years later wouldn't have been as large as you stated. Am I missing something?
What happens if the market drops a lot after Bob dies and before Christine dies. This assumes our IRAs will be worth more 10-15 years from now. Is good advice otherwise, though. Definitely take the inheritance over ten years.
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.
What you do not cover is the impact of leaving the annual distributions inside the IRA. Paying income tax on the annual distributions results in les groeth of the IRA.
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.
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.
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!
I have directed my 401K to the Educational (non )Profit of my college fraternity. an attorney has told me that as a non profit they will not pay any tax on it. True?
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.
I have a freind who has the same problem .He has an inherited IRA from a loved one and has to drain it in ten years and take a RMD by the end of this year or pay a penalty.Can he roll it over into something so he wont have to drain it in ten years.Right now his RMD is 15000 a year or pay a penalty.He is 60yearsold.
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?
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.
My lender is demanding my power of attorney in order to refinance, I am local and able to attend settlement is it legal for them to demand this from me?
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.
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.
My wife and I both have 401k's. We have each other as primary beneficiaries and children as contingent. If I die can she just roll my 401k over to hers rather than get a payout?
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.
Paul. I hear what you are saying. It would have been nice if you did your scenarios to the comparable end point of 25 years after dad died. Scenario 1 is each kid pays about $800k in taxes 25 years after dad’s death, But they hav about $1.4m remaining after tax. . Scenario 2. This is what I would have liked to have seen so I’m making some assumptions. Kids each get $400k at time of dad’s death. The do a back door Roth conversion over a couple of years and it grows tax free for about 25 years. Now they have $1m. Approximately $1.4m vs $1m after tax. Your tax argument doesn’t seem to be valid. Yes my numbers are VERY rough. It’s 6am and I’m in bed doing this in dark. :lol There are MANY good reasons to consider your approach but tax savings doesn’t seem to be one. Cheers.
I think you are a tad harsh on the "suggested" inadequacies of financial advisors, CPAs and "probate-only" lawyers. People with the money your example talks about should spend $500 or $1,000 a year on a quick review-planning visit with their CPAs *after* tax filing season, when they have time to think.
If the wife's tax bracket is lower than the children's tax brackets, then it will make more sense for her to keep the deceased husband's IRA, and convert it as much as she can to her ROTH IRA and maintain (the conversion) at her tax bracket that is lower than her children's bracket. After the wife die the children will inherit tax free ROTH IRA from the wife. In fact, both wife and husband should start converting to their ROTH IRAs and pay tax at lower bracket than the children's.
