John, good to see you. Today we are talking about a conversion as a gift to your beneficiaries. When considering which assets to leave your beneficiaries. There is one that is loaded with taxes, IRAs, inheriting an IRA is very different from inheriting a Roth IRA. Can you explain the difference between taking distributions between a traditional versus a Roth?

Yeah, and you know, let's not just stop with traditional IRAs we can go 401 K's for any tax deferred or let's be more truthful, tax postponed vehicle so these vehicles you made an agreement whether you knew it or not with the IRS to be partners, and you're saying listen, I'm gonna postpone the tax on my income now, get that deduction, and you're gonna take it out later. And so now when you're taking out this money from your IRAs, or when your beneficiaries, be it, your spouse, if you die or your children, they have the taxes passed to them. When we talk about death taxes, most people think estate taxes, when in reality currently, very few people have to worry about estate taxes. But the biggest taxes passed on are the death taxes of these tax postponed accounts. So whenever they get this money, they're going to have to take it out at their filing status, whether it's single married filing jointly, for the widow tax, like we say, are the beneficiaries, right? You have that very successful child that's a doctor or are a high-end CEO or Executive. They're already in a high tax bracket. Now you just added to it because the taxes that were postponed at your tax rates are now passed to them at their tax rates.

Whereas the Roth IRA, right and so the Roth IRA, when they take that money out, you already bought out the IRS. So again, we talked about this as as a major, major motivator for people is the widow tax. You the surviving spouse now has some control over their Medicare premiums and their ordinary income taxes because they have access to tax free distributions. But more importantly, your beneficiaries, your children also have that tax free benefit, right, those distributions will be tax free. So here's one thing that I'd always tell a beneficiary of a Roth IRA. If you have any other accounts that you can pull from for a distribution, and we know beneficiaries, you know, they start they do remodel, they do all those things early on, pull from other accounts, do not pull from your Roth IRA, let that money stay there and let that money grow.

Now, to make matters more complicated after the passage of the secure act, most non spouse beneficiaries can no longer stretch those distributions over a lifetime. But they have to drain the entire balance in 10 years that is quite the tax burden.

Yeah. So the spouses as you said non spouse, the spouse is still can stretch it, they can make it into their own IRA. If the scenario is right. Non spouse beneficiaries, in most cases being the children cannot stretch it out. It used to be a powerful planning tool where a you know, 30 or 40 or 50 year old beneficiary could stretch the payments out over their lifetimes, which could be decades. Now that money has to be taken out. In a best-case scenario, the money has to be out of the account zero balance by year 10. So what that does now is going back to that high, high income earning child now they have to decide, you know, hey, how am I going to take this all this money out in 10 years and control my taxes, whereas that Roth IRA, you don't have that problem? You don't have to you don't have to pay the taxes on it. So again, let that money sit there, let that money grow tax free for 10 years, then empty it out. You get the distribution tax free, but even better, you got 10 years’ worth of potential market growth tax free.

Right. Good point. I think a lot of us think the IRA is a gift to your beneficiaries, but the real gift would be converting the IRA to a Roth. Yeah, exactly. Yeah. And so many people get caught up in wanting to gift to their children. Yeah, I think kind of gifting is sometimes in most cases, highly misunderstood. You want to give something gift, you know gift, the Roth conversion, and not only is it not only are you going to help yourself out with RMBs in the future, and you're buying, you know the IRS out at a you know, in my opinion and in a lot of professionals opinions, the lowest tax rates that we're gonna see, but you're also given your your spouse and your beneficiaries, you know, in most cases your children the gift of a tax free distribution when you pass and to me, that's a huge legacy.

Yes, exactly. And one nudge to consider a conversion now is the five-year rule. Explain that, John? Yeah. So there's a lot of nuances to this but you have to understand this. Do a conversion of any amount now get this account this Roth IRA establish, because there's a five year rule no matter how old you are. So, if you're a beneficiary of a Roth IRA, you need to understand that if that Roth IRA was just established within five years, that you may have some tax penalties if you take that money out, before the five year rule is applied. So, you know, there's a lot of nuances that I just wanted to mention it to get it out there that make sure that these conversions have been established for five years before you go taking distributions because you're going to get a 10% tax penalty if you violate the five-year rule,

right, which is why it all comes back to proactive planning, right, John? Absolutely. Absolutely.

So, if somebody has questions about starting that conversion process or figuring out if it makes sense for them and their family, what's the best way to reach you?

Well, you can always visit our website. We have tons of resources on there, www. Go securus.com. And while you're visiting the website, you can go to the contact us tab, and you can schedule a 15-minute phone conversation answering questions, or a complimentary vision and clarity consultation. Or if you'd like to do it the old school way. Give us a call at the office 858-935-6210 asked to speak with Emily Wale and she will get you on our calendar.

Perfect. All right, John, thank you so much. Thank you Erin