Over the next two decades, we're set to witness the largest transfer of wealth in history. An estimated $90 trillion will be passed down from Baby Boomers to their spouses and younger generations.
While planning for the death of a loved one isn't a pleasant topic, it's crucial to understand the financial implications to plan effectively.
If you anticipate passing on or inheriting wealth, this information is essential for you.
🧠 What you need to know
A significant portion of wealth is often held in retirement accounts, including Individual Retirement Accounts (IRAs). Passing on or inheriting an IRA as a designated beneficiary can be complex due to tax rules. Planning ahead can help you avoid unnecessary losses.
Inheriting an IRA (other than spouses):
Due to legislation passed in 2019, you must empty an Inherited Traditional or Roth IRA within 10 years. This applies to IRAs inherited from individuals who passed away after 2019, with some exceptions.
Withdrawals from Traditional IRAs (not Roth IRAs) are treated as ordinary income. In any given tax year, a withdrawal could significantly impact your tax rate.
A simplified example:
Imagine you inherit a Traditional IRA worth $500,000, and your current income of $100,000 per year puts you in the 24% federal tax bracket. If you withdraw $100,000 from the inherited IRA in one year:
1. Your taxable income doubles to $200,000
2. This pushes you into the 32% tax bracket
3. You'll owe approximately $32,000 in federal taxes on the IRA withdrawal alone
4. Your effective tax rate on your regular income will also increase
By spreading the withdrawals over several years and staying within the 24% bracket, you could potentially save thousands in taxes.
Planning to pass on inheritance:
If you're planning to pass on your wealth to younger generations, consider strategies to potentially optimize the tax situation for your beneficiaries, such as strategic Roth conversions or using Traditional IRAs for your own expenses. Passing on a taxable brokerage account may be more tax-efficient.
Inheriting an IRA from a spouse:
Inheriting an IRA from a spouse is more straightforward:
- You can treat the Inherited IRA as your own, roll it over into your own IRA, or remain the beneficiary. If you choose to rollover, you must roll traditional IRAs into traditional IRAs and Roth IRAs into Roth IRAs.
- IRA owners must take required minimum distributions (RMDs) after age 73. If you inherit an IRA and you're younger than 73, you can delay taking RMDs, even if your spouse was over 73.
🤝 How can Mezzi help?
Mezzi offers several tools to help you connect and manage Inherited IRAs alongside your family's other assets:
- Plan effectively with family collaboration: Share important investment accounts with your loved ones. Invite them as collaborators in Mezzi to facilitate transparent discussions about your most crucial accounts.
- Organize the entire family: Use Mezzi's Account Tags to easily distinguish between assets you own and those owned by other family members, including children.
- Manage tax exposure: Utilize Mezzi's Account Tags to track the allocation of your total assets between taxable and tax-advantaged accounts, such as Traditional and Roth IRAs.
