Personal FinanceCanva | dusanpetkovic from Getty Images and oneillbro from Getty Images ProMarc GubertiDave Ramsey regularly shares financial insights that can help people move closer to their long-term goals. However, it’s not every day that a guest comes on the show and surprises Dave with a valuable tidbit.That’s exactly what happened in this video. A Las Vegas caller with a $4 million portfolio talked about withdrawing funds from his traditional IRA and moving them all to his brokerage account. Right now, he has a $3 million IRA and $1 million in his brokerage account.I’ll share some thoughts, but it is good to speak with a financial advisor if you can.
Moving funds from a traditional IRA to a brokerage account can minimize your heir’s tax burden.
However, there are some rules to keep in mind before making this move.
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Who’s Responsible for the Tax Bill?Valery Evlakhov / Shutterstock.comIf you withdraw funds from your traditional IRA, you will end up with a tax bill. Your heir will have to pay taxes on any remaining traditional IRA funds. If you start withdrawing from a traditional IRA now, you minimize your heir’s tax burden. With a $3 million portfolio and only one daughter to give the inheritance to, it’s a good idea to trim it down.However, your heir won’t have to deal with the tax bill right away. In fact, your heir has 10 years to withdraw all funds from the IRA. If the heir doesn’t touch it for the first nine years, they must withdraw everything in the 10th year, which would result in a massive tax bill.What to Consider Before Using This IRA Withdrawal StrategyVitalii Vodolazskyi / Shutterstock.comIt makes sense for the father to withdraw from his traditional IRA and put the funds into a brokerage account, especially since he’s close to retiring. However, it doesn’t make sense for everyone. If the father had three children, each of them would receive a $1 million inheritance IRA out of the $3 million. It’s still going to be an expensive tax bill, but people who can split their retirement accounts to multiple heirs will reduce the cumulative tax burden.Furthermore, it makes more sense to withdraw from an IRA when your income is low. People who continue to earn high incomes in their 70s won’t benefit as much from rapid IRA withdrawals unless they have sufficient tax deductions available. It’s still good to whittle down the IRA instead of the brokerage account to minimize the tax burden on your heirs.Another Key Advantage of the Brokerage AccountTeerachai Jampanak / Shutterstock.comAlthough you get taxed on IRA withdrawals, it’s worth it to move some of those funds