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Individual retirement accounts are getting bigger, experts say — and that could create tax problems for retirees or their children who inherit their assets.
The average IRA or self-employed Keogh balance was $87,000 in 2022That’s up from $81,144 in 2019, according to a June report from the Employee Benefit Research Institute, which analyzed Federal Reserve data.
Starting in 2023, most retirees will need to begin taking required minimum distributions, or RMDs, by age 73, based on changes implemented by Secure 2.0. Through 2033, that age is raised to 75.
“Congress isn’t really helping people,” said CFP Sean Lovison, founder of Purpose Built Financial Services in the Philadelphia metro area.
By postponing required withdrawals, the pre-tax balance will continue to grow, which could lead to an increase in RMDs later, he said.
To reduce taxes in the future, some advisors recommend a so-called Roth conversion, which moves pre-tax or nondeductible IRA money into a Roth IRA. This strategy can be useful during low-income years because there is an upfront tax on the converted balance.
Large IRA balances also can create tax problems for adult children who inherit their parents’ accounts, experts say.
“Recent changes in the tax law have made pre-tax IRAs a less desirable asset to inherit,” said Williams of Veratis Advisors.
Before the Secure Act of 2019, heirs could stretch out IRA withdrawals over their lifetime, thereby reducing the annual tax. Now, certain heirs, including most adult children, have 10 years to empty out an inherited IRA.
A parent’s death often coincides with an heir’s highest-earning years, and taxes “can eat up a big chunk of an inherited pre-tax account,” Williams said.
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