You may be familiar with the term “ The Great Wealth Transfer.”   We currently find ourselves in an  inter-generational   wealth transfer  during which   the Silent Generation and the  Baby Boomers  will leave a staggering amount of wealth to their heirs.  Combined, they will leave behind an estimated $84 to $124 trillion in assets by 2045 (take note of the $40 trillion dollar range).  This will be by far the largest wealth transfer in recorded history.  The Baby Boomers will account for an estimated 63% of this transfer.  It may seem that my title is inappropriate,  Victims   of the Great Wealth Transfer?    

Two very different ways to save  

The Slient Generation and the Baby Boomers saved in very different ways due to the invention of retirement accounts.  Individual Retirement Accounts were signed into law in 1974 and the first contributions did not occur until January 1 st  of 1975.  The 401(k) plan was created by the Revenue Act of 1978 and did not go into effect until January 1 st  of 1980.  I apologize if you just came to the realization that you are older than retirement accounts.  By 1983, less than half large companies offered a retirement plan; widespread adoption of these plans was not until the 1990s.  The Silent Generation did not have a significant opportunity to contribute to these plans.  For the Baby Boomers, it is difficult to imagine a world without a 401(k) or some type of qualified plan.  For much of their working career – the Silent Generation saved in accounts that had been taxed.  For the Baby Boomers – they saved into tax deferred accounts.  That deferral creates a challenge when an IRA is inherited.  When a large IRA is transferred to the next generation, the taxes are also deferred – and deferred with a lot of rules.    

What are the rules?  

Should you be lucky enough to inherited IRA, there are rules you will to follow. The complicate rules you need to follow go beyond the scope of this publication.  In addition, the rules have changed thru the years, especially in the most recent years. To further add insult to injury, statistically – you will need to pay those taxes during a 10-year period that your personal income is at its highest.  On average, we lose our parents when we are in our 50s, which is often correlated with our peak earning years.  You could be forced to bump up a tax bracket.  Now you can see where the “victim” comes into the picture.    

A great problem to have?  

Yes, this is a great problem to have, but is it an avoidable one?  You can reduce the “victim” impact by simply reordering the distributions.  Many Baby Boomers were taught to preserve their nest egg during their working years.  This habit all too often continues well into retirement.  It is not until they are forced to take RMDs that they start to spend these accounts down. Many retirees are spending down their non-qualified assets and preserving their retirement dollars for later; thus assuring that the next generation will pay the maximum amount of unnecessary taxes to the IRS.  Due to the step up in basis rules regarding non-qualified assets (ask your advisor about this) the best account to leave assets to the next generation is spent down to preserve the worst place to leave assets to the next generation.    

Spend your retirement assets in retirement  

I am a strong proponent of using a retirement account for its intended purpose.  My father would say “use the right tool for the job at hand.”  The formal agreement with the IRS was that retirement funds would be spent on retirement.  It makes perfect sense that we will be penalized for not doing so.  So please, encourage your elders to take early, predictable and controllable distributions from the retirement account while they are retired.  Do not wait for them to be forced to do so in the form of a RMD or worse yet – do not wait until you are fulfilling my victim prediction.  At least open the conversation with them.  If you are not comfortable having this discussion, the team at Leading Edge Wealth Advisors would be happy to have a confidential conversation with them on your behalf.  The Silent Generation is often silent about finances, and the Baby Boomers are not much better.    

But what about the taxes?  

I know that I am upsetting at least one tax accountant with this suggestion.  Increasing IRA distributions will by nature increase annual taxation.  It is very important to make sure to consider the tax brackets during this process and adjust as needed to make sure one does not step up into a higher bracket unknowingly.  Is it not better to be in a situation where you have some control over the taxation than to have unexpected taxation thrust upon you?  The end goal would be an appropriate balance of distributions from both retirement accounts and non-retirement accounts.   

Final thought  

It is possible that I have created more questions than answers with this write up.  This concept is not discussed as much as it ought to be.  My hope is to leave you with a greater amount of tax- awareness and to encourage some intentional planning. Without proper planning, the Great Wealth Transfer could make some heirs wealthier on paper but “victims” in after-tax dollars.  This strategy also creates much needed liquidity for the late stages of retirement should it be needed. The great news is that there are a number of strategies you could use to intentionally solve the problem I hope I have made you aware of.    

Professionally managed distribution planning, especially around controlled IRA draw-down and estate structure can convert a potential tax trap into a smooth, controlled transfer of wealth that is aligned with your family’s goals.