Why You Should Never Die With Money in Your IRA

Most people think that leaving their kids the remaining balance of their IRA is a wonderful gift.

I don’t disagree that it’s a wonderful thought, and that anybody who receives an inheritance should be very grateful.

But, if money is transferred through an IRA, it can put the beneficiary in a very precarious tax situation.

The good news is that there are better ways to transfer money and completely avoid paying taxes in the process, but first, let’s talk about the implications of transferring an IRA.

First Pitfall of an IRA Transfer (A spouse inherits the IRA)

When a spouse inherits an IRA, they have 2 options (assuming they are not more than 10 years younger than their deceased spouse).

First, they can take the Required Minimum Distributions (RMDs) of the IRA based on either their life expectancy or the life expectancy of the deceased spouse.

Or they can take all the money out in 10 years.

Here’s where the problem arises.

For oversimplification, let’s say the IRA balance requires you to take $50,000 per year out and that’s your only income source in retirement.

As a married couple, you can take this out in the 12% tax bracket.

But, since one spouse is now deceased, the account is now going to be distributed as a single filer.

This means that the same $50,000 will now be taxed at 22%!

So, the tax bill on the same money has almost doubled.

If tax rates happen to go up, which they are anticipated to, this could cause an even greater tax bill that can eat away the proceeds of other assets (since you have to makeup that lost income somewhere).

Not exactly an ideal “wealth transfer”.

Second Pitfall of an IRA Transfer (an adult child inherits an IRA)

An (adult) child inheriting an IRA only has 1 option… they have to completely liquidate the IRA in 10 years.

This means that they have additional taxable income for 10 years that can easily push them into a higher tax bracket.

So, let’s say you pass $500k to your 26-year-old daughter who is married with a household income of $80,000 per year.

She now must take at least $50,000/year of IRA distributions (not counting the investment growth), which will now make her household income $130,000 per year.

This moves her and her husband from the 12% tax bracket to the 22% tax bracket!

Now I get it…

Who cares if your beneficiaries must pay taxes on money that they inherited for free?!

They should just be thankful right?!

They should absolutely be thankful, but why not keep your money in the family and cut the IRS out of the equation altogether?

And that’s the goal.

So, if you can cut the IRS completely out of the equation altogether and leave MORE MONEY to your family, why wouldn’t you?!

Here’s how you do it:

STEP 1 — Perform a strategic roth conversion on your money

Strategically moving money from your taxable IRA accounts into a ROTH account will not only remove the future tax liability for yourself in retirement, but it completely removes any tax liability for your beneficiaries down the road (helping them position themselves for a tax-free retirement as well).

This just so happens to dovetail perfectly with a strategy I talk about frequently on how to collect your social security check completely tax-free in retirement as well.

STEP 2 — Start positioning some of your assets into a cash-value life insurance contract

Having at least 4–5 years of retirement savings inside of a life insurance contract not only helps with collecting your social security check tax-free in retirement, but helps you retire completely tax-free, AND allows you to mathematically take almost twice as much income out of your retirement assets as you otherwise would be able to.

Most importantly, life insurance is also the absolute best way to transfer wealth tax-free to your beneficiaries and it is used very frequently by wealthy families to infuse tax-free capital into an estate so that the beneficiaries can take every single dollar out free of an IRS money-grab.

I love the IRS about as much as I love dipping my hand in battery acid, so to me, the less money we can give to the IRS, the better off we all will be.

Plus, less money going to the IRS just means more money going to your family.

Sounds like a win-win to me.