We know the SECURE act decimated stretch IRA’s, so what’s a mother to do? In thinking about this problem once again the solution is to play growth against taxes. An IRA generates ordinary income tax as money is removed, and it is governed by RMD. So a typical RMD on a 2M IRA looks like this
At age 80 the 2M has grown to 2.4M and the RMD is $126K. If you’re pulling 50K from SS your taxable income is 176K. If you’re MFJ, 176K is in the 24% bracket. At 90 you’re RMD looks like this
193K plus SS growth at 2% inflation means you make 61K in SS or 254K total and your tax bill is 43K/yr. Your IRA is still worth 2.15M You and your spouse die at 91. So the 2.15M is transferred to your kids, who then have 10 years to clean that IRA out. Tis means your heir has to remove 290K/yr from the IRA to get the job done
Lets say your kid makes 200K/yr. That means for 10 years he/she will be making close to 500K/yr and paying 117K/yr in taxes almost triple the 43K you were paying. Bummer! Right?
This is where Roth conversion comes into play. If you can get the 2M in the IRA down to 500K the taxes are much more manageable. A 500K portfolio would play out like this.
With the same 50K SS your taxable would be 81K and your MFJ taxes would be 6,147 based on the standard deduction. Your portfolio would be worth nearly 600K. At age 90
If SS at 90 is still 61K your taxable income is 109K barely into 22% (you leave 12% at 104K MFJ standard deduction) and your taxes would be 10,000. The portfolio is worth 535K at age 90. You and the Mrs both die at 91. This means your heir needs to disperse about 73K/yr over 10 years to clean out the account
Same 200K/yr makes his/her income 273K/yr and the tax burden only 48K a substantial savings over the previous 117K.
When the Roth is inherited there are no taxes to be paid and the Roth has the same 10 years to be cleaned out. Lets say you pulled just enough WR from the Roth to keep the 1.5M steady during your 20 years of RMD so 1.5M gets transferred. 10 years later that Roth would be worth 2.7M to your heirs tax free
That’s how you transfer wealth to your kids under the present SECURE tax regimen without annuities or Donor funds. The advantage is you get to use your money for you as cash flow during your life and your kids get a windfall when you pass. I estimate a tax free 4% WR on 1.5M will generate 60K/yr in income over the course of 20 years at 6% growth plus you will be taking the RMD on the IRA and SS. You pay minimized taxes during your life, since with Roth conversion all the taxes get paid sooner instead of later. Later costs more in taxes because of the progressiveness of the tax code and RMD percentages. You do pay all the taxes you owe, but you get to adjust those to your benefit not the governments benefit. If you want to convert even more you can take more out of the IRA over and above the RMD amount but just keep the total taxable income under 104K/yr. The excess money above the RMD amount pulled from the IRA can be put in the Roth to gather interest or you can just live on that extra money and have a smaller WR on the Roth.
The trick to this is efficient Roth conversion BEFORE RMD, and the trick to that is planning well in advance of actual retirement. Much of this blog has been devoted to understanding Roth conversion.