Moving reg IRA to Taxable portfolio

[Original Wally]

OK - so I have always tried to be a good dad. DW and I (both 70) have 3 children. We want to pass 30% to each and 10% to a favorite charity.
Our estate is more modest than many in this forum - About $1.3M


OF THAT, about $300k is in IRA accts. To make it easier on the kids, I have been moving $$ from IRA to after tax brokerage accounts - absorbing the tax hit NOW so the kids will inherit assets free and clear.



Question for y'all: Is that completely crazy? I just don't want to pass a tax burden on to the kids. Sigh.

 

[Rianne]

All that matters is what you feel comfortable with and want to do a good deed of protecting your kids from paying taxes. I assume you mean moving from IRA to Roth so they won’t inherit taxes.

 

[RunningBum]

First, you should try to estimate the tax rate they would have taking the required distributions over 10 years vs the tax rate you are paying now. If their tax burden (rate) is less, wouldn't it be better to let them take the distributions so they can get more money in the end?

Second, why don't you convert the money to a Roth rather than move it to your taxable account? This way you don't get taxed on dividends while you are alive, and your kids get 10 years of tax free dividends before they are required to take the full distribution of the Roth. This is also less work for your kids, because inheriting a Roth is very simple. Inheriting a taxable account means they have to establish a cost basis at the time of death, and they probably don't want to deal with that right away.

For charities, it is clearly better to leave that money in your IRA since they can take the IRA money and not pay tax to use it. This gives them more money than you paying the tax on it and them inheriting the after tax proceeds.

 

[Midpack]

Not necessarily crazy, as long as you're mindful of your marginal taxes. I wouldn't think you'd want to take IRA distributions so fast that you pay into a higher bracket than you'd otherwise have to. If your kids inherit your TIRA, they have 10 years to deplete the funds - so if they're in lower tax brackets than you are, they might pay less in taxes than you are now. IOW they could net more than you taking the tax hit now.

Of course if they're in high(er) tax brackets, you might want to convert your TIRA to a Roth instead of you just taking TIRA distributions and paying taxes now. Then they inherit the Roth tax free IIRC.

 

[MarieIG]

As long as you are paying the taxes on the distributions, why not do Roth conversions and name the kiddos as (contingent) beneficiaries so they can inherit after the passing of the second spouse. That would potentially allow the funds to continue to grow and allow them to withdraw tax free over a ten-year period.

 

[Montecfo]

I never heard of anyone complaining about inherited money because they had to pay tax on it. Isn't an inheritance like found money?

So this is not something I would do. Will your strategy leave them more net cash or less?. Hard to know or say.

 

[FIREd_2015]

...I have been moving $$ from IRA to after tax brokerage accounts - absorbing the tax hit NOW so the kids will inherit assets free and clear...

It seems to me a better option might be to move (convert) $$ from IRA to ROTH. You still absorb the tax hit NOW and the kids will inherit assets free and clear but the earning are forever tax free (or until Congress changes the rules).

 

[jazz4cash]

It is kinda crazy. How is it a burden if you are providing funds to pay the taxes? As mentioned if their rate is low you could be paying MORE in taxes leaving less to spend. It

 

[pb4uski]

I think you would be better off to do Roth conversions than withdrawals and reinvest in brokerage account. That way, income on that money will be tax-free for the rest of your life, and can be tax-free for as much as 10 years for your kids after you die.

 

[RetiredAndLovingIt]

+1 for Roth Conversions. You pay the taxes and now it continues to grow tax free for as long as you live and then your kids have 10 more years to empty it, again tax free.
I'm converting a portion of my IRA to Roth each year up to the top of the 12% tax bracket to move as much over from the taxable to the tax free side of the ledger. I've also explained it to my kids so they understand it.

 

[Sunset]

I think you would be better off to do Roth conversions than withdrawals and reinvest in brokerage account. That way, income on that money will be tax-free for the rest of your life, and can be tax-free for as much as 10 years for your kids after you die.

Agreed...

Since OP seems to not understand, I'll add clarification about the Roth:

And then after 10 years of tax-free growth, the kids can withdraw tax-free all that Roth money that has grown tax-free, The entire thing is tax-free.

 

[pb4uski]

I'm doing that with an inherited Roth IRA. I'm investing it aggressively since it is "found money" and will withdraw it at the end of the 10th year so all of the 10 years of growth will be tax-free.

Speaking of which, if I pass away before the 10 years is up and my son inherits the Roth from me, does the 10-year window start over? I think so.

 

[thod]

If these IRA withdrawals are RMDs, then converting to a ROTH is not an option for the RMD amount. Anything above the RMD could be converted to a ROTH however. The original poster did indicate they are both 70 years old.

 

[pb4uski]

If these IRA withdrawals are RMDs, then converting to a ROTH is not an option for the RMD amount. Anything above the RMD could be converted to a ROTH however. The original poster did indicate they are both 70 years old.

Agree, but since they are currently 70 they are not currently subject to RMDs and can do Roth conversions. They have 3 more years before RMDs start at 73.

And even once they are subject to RMDs while the RMD can't be converted to a Roth if they have additional headroom in their target tax bracket after including the RMD then they can do Roth conversions on top of the RMD.

 

[marko]

I never heard of anyone complaining about inherited money because they had to pay tax on it. Isn't an inheritance like found money?

So this is not something I would do. Will your strategy leave them more net cash or less?. Hard to know or say.

It is kinda crazy. How is it a burden if you are providing funds to pay the taxes? As mentioned if their rate is low you could be paying MORE in taxes leaving less to spend. It

Two cents from a severely math challenged person....

IMO there's nothing better than money growing tax deferred. Why pay the tax now and have to make up the 15, 20 or 25% that you paid in taxes just to get back to your starting point?

I'd leave it be, let it grow tax free and when the time comes have them pay the taxes on a much, much larger sum, and they might be in a lower bracket as well. Let the IRS wait as long as possible.

 

[Original Wally]

THANK YOU ALL for the varying opinions.



DW and I have decided to suspend the annual conversions and will let the IRA ride. The kids will get what they get and simply have to deal with the taxes.



**I** will be gone so that cannot complain to me! LOL

 

[Wetfly93]

Moving regular IRA to a taxable portfolio

Another item to consider is if you have been doing this in the past you are now increasing your taxable income. The Ira you cashed out and placed in your brokerage now makes you income and could increase the amounts you pay for social security deductions.
You mentioned you have 1.3 million. If you convert your Ira over the next three years to a Roth this can be used as a legacy account. Growth is tax free, your three children can be listed as beneficiaries after your spouse. You will be pleasantly surprised at how fast your Roth grows and this growth does not impact your taxable account except in the first year. Paying the taxes from your taxable account is the best way to accomplish the greatest growth, I.e. do not take the taxes from the Ira being transferred to a Roth.

 

[harley]

I never heard of anyone complaining about inherited money because they had to pay tax on it.

I have. I've known people whose parents have worked their entire life and built a successful business, only to have the federal and state gov't take approximately half of it for estate taxes. I know the laws have changed now (and probably will again soon), but 20 or so years ago it could be pretty brutal.

Isn't an inheritance like found money?

So this is not something I would do. Will your strategy leave them more net cash or less?. Hard to know or say.

I tend to agree, in general. Converting from your tIRA to a Roth can make sense, both for you and for your heirs. Although you have to run the numbers to figure it out. It's not hard. But with a tIRA of $300K I wouldn't worry about the heirs. If RMDs will put the surviving spouse in a higher bracket, it might be worth it. If the kids are in a high enough bracket to have it make sense for them, the amount you leave them probably won't matter that much, so why bother. But just moving it from tIRA to taxable doesn't make much sense to me.