Ralph is in a really high tax bracket. And even though he looks pretty good, he is really about to die. And his kid is broke, alright?
So, if Ralph does a Roth conversion, he does a Roth conversion at like 35% or even higher, and then he dies, and he leaves it to his kid who is in the 0% bracket. Well, that doesn’t work, right? If that was the situation, I would say, “Ralph, don’t do a Roth conversion.” Ralph says, “Yeah, but if I don’t do a Roth conversion and then I die, it’s too late to do a Roth conversion.” Aha, but it is not too late.
You see, Ralph went to some fool advisor, and the fool advisor said, “Hey, you should take your 401(k) or your 403(b) and roll it into an IRA, and I’ll manage it for you, and I’ll charge you 1%.
He almost did that but luckily, he came to me instead. And I said, “Hey, Ralph, don’t roll the money into an IRA. Let’s set up a one-person 401(k) plan for you and take your 403(b) money and put it into a 401(k).” So now Ralph dies with a 401(k) plan, and he is in a really high tax bracket, and he leaves it to his kid who is in a really low tax bracket.
Wouldn’t it be cool if his kid could make a Roth IRA conversion? No, because beneficiaries aren’t allowed to make a Roth IRA conversion. They are, however―if his plan allows it―they are allowed to take an Inherited 401(k) and make a Roth conversion of the Inherited 401(k) at their tax rate.
So, you make the Roth conversion after you’re dead. You can potentially save hundreds of thousands of dollars, maybe more, by doing that. And that works really well if you’re in a high tax bracket and you have a kid who is in a low tax bracket.
And if you combine that with the strategy I gave earlier―Who Gets What?―and Ralph has one kid in a high tax bracket and another kid in a low tax bracket, what he can do is make a Roth conversion, leave his traditional Inherited 401(k) to the kid in a low bracket―who then does a conversion at a low income tax bracket―and then he leaves the Roth to the kid who is in the high tax bracket. If he does both of these things, he is saving hundreds of thousands of dollars.
And let’s say he’s a “died-in-the-wool” Vanguard guy, and he doesn’t want to pay an advisor a nickel to tell him how to invest his money. I just saved him hundreds of thousands of dollars, and we only are going to charge him a $15,000 fee. And by the way, that’s not a random number, that is what we charge for a Financial Masterplan. But that’s a pretty good deal, right? You get a 30% or 40% return on your investment in a couple of years.
But to me, that’s my big thing―it is strategy.