We are entering the largest wealth transfer in history.
Over the next 25 years, according to a report from research firm Cerulli Associates, 45 million U.S. households will pass a mind-boggling $68 trillion to their children — the biggest generational wealth transfer ever.
Individual retirement accounts alone in the U.S. held more than $9 trillion in assets at the beginning of last year, according to the Investment Company Institute's 2018 Investment Company Fact Book. To that point, many Americans are inheriting substantial wealth from their parents through IRAs. But mistakes in handling these accounts could result in needlessly losing much of this wealth to taxes. In order to increase the chances of a successful wealth transfer, it's important to understand the proper steps to follow.
Any mistakes in handling inherited IRAs can incur hurtful taxes. To avoid these errors, heirs should have a thorough understanding of rules, preferably with the help of a qualified tax professional. Otherwise, they could end up paying an unexpectedly large portion of this inheritance to Uncle Sam and prematurely losing the main benefit of these accounts: long-term tax-deferred asset growth.
The rules for non-spouse beneficiaries are more restrictive than those for spouses. Common errors by non-spouse heirs of traditional IRAs include:
By understanding the rules before acting, heirs of IRAs can plan in ways that avoid unnecessary taxes and assure continued tax-deferred growth.
The key is to not touch the account without awareness of the consequences and to get a grasp of tax rules quickly, as various deadlines are involved. After the account is correctly transferred into a properly titled inherited account, cash can be taken out with minimal tax consequences in the form of RMDs.
— By David Robinson, founder/CEO of RTS Private Wealth Management