Should We Convert to a Roth or Leave It for the Kids to Inherit?

Summary

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Podcast Episode Summary

Ramsey Everyday Millionaires

Episode: Should We Convert to a Roth or Leave It for the Kids to Inherit?
Date: September 24, 2025
Hosts Featured: Dave Ramsey
Caller: John, California

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Episode Overview

This episode centers on an in-depth discussion about whether to convert a large traditional IRA to a Roth IRA or leave it to be inherited by the next generation. John and his wife, both retired and financially secure, seek Dave Ramsey’s advice about managing their sizable IRA accounts in a way that minimizes taxes and maximizes legacy for their children. The conversation unpacks the pros and cons, tax implications, and strategic financial planning required for retirees grappling with similar decisions.

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Key Discussion Points & Insights

1. Caller’s Financial Situation & The Roth Conversion Dilemma

• [00:21] John explains his position: retired, not dependent on IRA savings for living expenses, and facing choices about how best to handle $4 million in retirement accounts ($3M traditional IRA, $1M Roth, $500K liquid).
• Main question: Should they convert more to Roth and pay taxes now, or leave the bulk in traditional IRA for their children to inherit, knowing the tax consequences?

2. The Two Main Problems With Leaving It in Traditional IRA

• Required Minimum Distributions (RMDs):
  • Starting at age 73, IRS mandates withdrawals from traditional IRAs, which are taxed as income.
  • With a $3M account, RMDs will be "six-digit numbers."
  • Dave Ramsey [03:11]:

    "Problem number one is the RMDs... that means at 73, they require you to begin to distribute traditional because they are bent on getting their taxes...as you said, with $3 million it’s gonna be over $100,000. And so that $100,000 comes out, it’s 100% taxable."

• Taxation for Heirs (The “Biden Secure Act”):
  • Inherited IRAs must be liquidated and taxed within 10 years, heaping a large tax burden on heirs.
  • Projected growth means the tax hit will only escalate.
  • Dave Ramsey [04:17]:

    "When they get that money under the Biden Secure Act, they are now required to liquidate that fund and pay taxes on all of it over a 10-year period of time. So $300,000 a year on $3 million."

3. The Logic Behind Roth Conversion

• Tax-Free Growth:

  • Moving money to a Roth means paying taxes now, but then the growth is tax-free, and there are no RMDs.

• Control & Legacy:

  • You “control your nest egg” without forced distributions.
  • Heirs inherit the Roth IRA tax-free.
  • Dave Ramsey [05:29]:

    "It’s going to be a lesser amount when the smoke clears because of the stinking taxes and then it’s going to grow completely tax free from then on, not be subject to RMDs...when you leave it to them, you leave in a Roth IRA tax free and they pay no taxes on it."

• Compounding Problem if Waiting:

  • If left untouched at a 10% return, the account doubles every 7 years, making future tax liabilities much greater.
  • Dave Ramsey [06:11]:

    “If it’s in good mutual funds...by the time you hit RMDs, it’s going to be $6 million...that $6 million is going to be $12 million...it’s going to be substantial taxes. So yeah, in terms of dollars. So it sucks right now, but it’s going to triple suck later. I would do it.”

4. The Emotional & Practical Challenges of Paying Taxes Upfront

• Caller John [06:37]:

  "My wife isn’t on the same page because she doesn’t get excited about paying...”

• Dave Ramsey [06:49]:

  “Well, you know, you want to pay taxes on $12 million or on $3 [million]? It’s just a matter when you’re going to do it. Somebody’s going to do it someday.”

• The inevitability of taxes:
  The only choice is when and how much you pay; the tax bill rises the longer you defer conversion.

5. Execution Strategy for Conversion

• Use Liquid Funds First:

  • Pay taxes on conversion using the $500K in liquid funds (mutual funds, bank accounts), converting as much as possible now.
  • Remaining IRA to be chunked out year by year over a few years.
  • Dave Ramsey [07:50]:

    “I would use the majority of that 500 today and that would move about 2 million...then the other million...I’m going to chunk it out over about three years and just take the hit, take the pain, and then be done with it.”

• No Conversion Limit:

  • John [07:57]: “Is there a limit for how much you can convert per year?”
  • Dave Ramsey [08:00]: “Nope. You can do it all. But the taxes are taxes and he’s got so much he’s going to have bracket creep anyway.”

• Rip the Band-Aid Off:

  • Dragging out conversions doesn’t help with marginal tax brackets in John's case. Best to convert quickly and be done.
  • Dave Ramsey [08:13]:

    “So I’m just going to rip the Band-Aid off and it sucks. But welcome to tax law.”

6. Recognizing John & His Wife’s Accomplishment

• Everyday Millionaires archetype: Teachers and accountants are among the most common paths to wealth for first-generation millionaires.
• Dave Ramsey [07:22]:

  “Two of the top five categories of people who become millionaires, teachers and accountants...You guys are incredible. You’ve done a good analysis on it, John. You did have your facts straight. You know what you’re talking about. You’re just trying to think it through.”

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Notable Quotes & Memorable Moments

• On timing taxes:

  “It sucks right now, but it’s going to triple suck later. I would do it.”
  — Dave Ramsey [06:26]

• On “Bracket Creep”:

  “He’s going to max it out every year anyway. So there’s no way to avoid his bracket creep.”
  — Dave Ramsey [08:07]

• On legacy and family:

  “You already have changed your family tree, by the way. You guys have done great.”
  — Dave Ramsey [07:09]

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Important Timestamps

• [00:21] – John’s question and financial overview
• [03:11] – Explanation of RMD and tax impacts
• [04:17] – Secure Act and heirs’ tax burden
• [05:29] – Roth solution: regain control & tax-free growth
• [06:11] – The compounding tax problem of deferring conversion
• [06:37] – Emotional side: convincing a reluctant spouse
• [07:50] – Step-by-step Roth conversion strategy
• [08:00] – No limits on Roth IRA conversions
• [08:13] – Summary: “rip the Band-Aid off”

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Conclusion

This episode offers a practical, clear-eyed look at the dilemma many affluent retirees face: should you convert a traditional IRA to a Roth, pay a hefty tax bill now, and leave a tax-free inheritance, or defer, risking higher taxes later for both you and your heirs? Dave Ramsey’s advice is unequivocal and rooted in long-term financial wisdom: the pain is less now than it will be later—rip off the Band-Aid, convert as much as you can, and rest easy knowing you’ve maximized both your control and your legacy. The conversation is peppered with gratitude and affirmation for John’s prudent financial journey, reminding listeners that disciplined, everyday decisions can yield multi-generational benefits.

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Transcript

[A]

This episode is brought to you by Smartvestor. Connect with an investing pro near you at ramseysolutions.com Smartvestor John is in California.

[B]

Hey John, how are you?

[C]

I'm great, Dave. How are you guys doing?

[B]

Better than we deserve. How can we help?

[C]

Well, I'll give you a little background. My wife and I are both retired and we're struggling and trying to decide what we would like to do with what we've accumulated over our lifetime. And specifically your viewpoint in regards to IRA conversions to Roth, Just to give you a few numbers, we got about half a million dollars in liquid mutual funds and bank account and we've got about $4 million in IRA accounts. One million of that is already in a Roth and 3 million is in a traditional IRA. And I've been looking at a bunch of numbers and reading a bunch of things and what I'm trying to decide on is, is it better for us to try to do some conversions between now and when we reach R d at age 73, which is about seven years from now, or just look at our traditional IRA grow. And my concern is that if I just let it grow during our lifetime, you know, the RMDs are going to be six digit numbers.

[B]

Yep.

[C]

This is not money we need to live on. We live within our means on just fixed income and have been able to, you know, accumulate a lot and not spend anything. And so now I just don't want to make a mistake with what we've been blessed to accumulate. So I'm curious what your viewpoints are about paying, you know, what I calculated to be about 1.2 or 3 million over the next five or six years. Doing step conversions to Roth or just letting you know our three adult children inherit multi millions in a traditional IRA someday.

[B]

Honestly, the answer to your question I stumbled into backwards. I did not. I was not smart enough to do it on purpose, but I accidentally did a brilliant thing, to be very clear. And the brilliant thing was that early on I converted everything to Roth. You and I are the same age. I'm getting ready to be 65, okay. And everything is in Roth. And the reason that ends up, I did it just because I wanted the tax free growth. That's right. That's the only reason I did it. And so I started converting stuff many years ago and anytime anything popped up that was not, that was traditional, I immediately made it into a Roth. Now the result is exactly what you're facing. And you've analyzed this very well. You've done a good job. You have two problems with the traditional that are mammoth. Problem number one is the RMDs. The required minimum distribution is what that stands for for those of you that don't know John Does. And that means at 73, they require you to begin to distribute traditional because they are bent on getting their taxes. And so they make you take that, that has never had been taxed yet, and that is not tax free. And, and begin to distribute it. And as you said, with $3 million it's gonna be over $100,000. And so that $100,000 comes out, it's 100% taxable. And so it's gonna be reduced by 37% or whatever, whatever the number is, 30%, whatever it ends up being depending on what your other incomes are. Yeah, that's problem number one is you're forced into RMDs. You do not have RMDs, as John knows on Roth. And so I don't have any required minimum distributions facing me when I hit 73. The second problem is that the traditional IRA or traditional 401k, when it becomes an inherited IRA, naming your child as the beneficiary, it goes to them or your wife, and then later your child is a secondary beneficiary. However that works out when they get that money under the Biden Secure act, they are now required to liquidate that fund and pay taxes on all of it over a 10 year period of time. So 300,000. So 300,000 a year on 3 million. Oh, by the way, it's not going to be 3 million, it's going to be 9 million. Because you're going to live a while. Okay. And you're not touching it.

[C]

I'm on the same page.

[B]

So those are the two concerns, those are the two problems. And so that makes me, it's pay me now, pay me a lot more later is the equation. And so I'm going to start working out of this pretty quickly. I'm going to use a substantial part of that 500k in mutual funds and after tax investments over there, and I'm going to use that and move as much of the 3 million as I can this year.

[C]

Right.

[B]

And then I'm going to as much as I, you know, and then I'm going to use the 3 million, what's left? I'm going to pay taxes out of it as I do it each year and it's going to be a lesser amount when the smoke clears because of the stinking taxes and then it's going to grow completely tax Free from then on, not be subject to RMDs. You're back in control of your nest egg. The stinking government's not their meat hooks in you. And they don't get to hook your kid in the next generation. When you leave it to them, you leave in a Roth IRA tax free and cash it out the day you die. And they pay no taxes on it. And so because here's the thing, you're sitting on $4 million, 3 million in this thing. And if it's in good mutual funds and you're, by the time you hit RMDs, it's going to be 6 million, it will have doubled. And seven years later, when you're 80 and if you're in good health, your probability of living to 80 from 65 is very high statistically. Okay, so then that 6 million is going to be 12 million. And if it's all sitting there, hasn't paid taxes on it yet, except for the RMD portion, it's going to be substantial taxes. So yeah, in terms of dollars. So it sucks right now, but it's going to triple suck later. I would do it.

[C]

Yeah, you're, you're, you're telling me what I was hoping you were going to tell me. My wife isn't on the same page because she doesn't get excited about paying, you know.

[B]

Well, you know, you won't pay. You want to pay taxes on 12 million or three.

[C]

Yeah, that's a good way of putting it.

[B]

You know, it's just a matter when you're going to do it. Somebody's going to do it someday. And if you guys don't use this money and it's invested at an average of 10%, it's going to double every seven years. And so you're going to get hammered.

[C]

Like the last call. They're changing the family tree and the next generation.

[B]

You already have changed your family tree, by the way. You guys have done great. I assume you started with nothing.

[C]

Yeah, we're everyday millionaires. Longtime listeners. First time caller for you, but my wife's a retired teacher and I'm a retired cpa, so.

[B]

Love it.

[C]

We've been, been doing this for a long time.

[B]

Two of the top five categories of people who become millionaires, teachers and accountants. Yeah. You did it. You did it, you did. You guys are incredible. You've done a good analysis on it, John. You did have your facts straight. You know what you're talking about? You're just trying to think it through. And if I woke up in your shoes. I would use the majority of that 500 today and that would move about 2 million of the four of the three out. And then the other million that's laying there, I'm going to chunk it out over about three years and just take the hit, take the pain, and then be done with it.

[C]

And is there a, is there a.

[B]

Limit for how much you can convert per year? Nope.

[C]

You just got to.

[B]

You can do it all. But the taxes are taxes and he's got so much he's going to have bracket creep anyway. He's going to max it out every year anyway. So there's no way to avoid his bracket creep. So there's no way to stage it. Actually, that makes sense. So I'm just going to rip the band aid off and it sucks. But welcome to tax law.

[A]

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