We’re in the midst of a great wealth transfer, but if you’re inheriting an IRA there are a few common mistakes that could drain your windfall. By 2048, boomers and the Silent Generation are expected to transfer $124 trillion, according to Cerulli Associates’ U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2024 report. (1) Of that, charities are expected to receive about $18 trillion while Gen X and millennial heirs will receive the remaining $105 trillion. Along the way, $54 trillion will be passe ...

Core Insights - The article discusses the complexities of tax and estate planning, particularly for retirees like James and Andrea, who have taken significant steps to prepare for their financial future and long-term care needs [1]. Group 1: Estate Planning - James and Andrea have established comprehensive estate planning documents, including wills, durable powers of attorney, living trusts, and have communicated their health care and funeral wishes with family and professionals [2]. - Their assets include a fully paid-off home valued at $2 million, art worth $100,000, a brokerage account with $500,000, and an emergency savings account of $100,000, all placed in a living trust to avoid probate [3]. Group 2: Retirement Accounts - The couple is considering consolidating and converting $2.8 million from traditional IRAs to Roth IRAs, which would allow for tax-free withdrawals under certain conditions [4]. - Roth IRAs do not have required minimum distributions (RMDs) during the account holder's lifetime, providing flexibility in withdrawals and allowing the account to grow tax-free [5]. Group 3: Tax Implications - Converting funds from traditional IRAs to Roth IRAs will incur taxes, and the couple currently has an annual income of approximately $235,000 from RMDs, a small pension, and Social Security benefits [6]. - The tax rate for married couples filing jointly is set to increase from 24% to 32% in 2026 at an income threshold of $403,550, indicating a strategic opportunity for conversions before the tax increase [6].

Core Insights - The article emphasizes the importance of accounting for all potential expenses in retirement planning, including discretionary spending and emergency savings, to ensure a comfortable retirement [1] - It highlights the significance of investment strategy, noting that both the amount invested and the risk level are crucial as retirement approaches, to balance growth and protection against market downturns [2] - The article discusses the benefits of having a substantial retirement savings, specifically mentioning that with $1.6 million, one could withdraw $64,000 annually under the 4% rule, which aligns with expected living expenses [3] Investment Strategies - The article advises on the necessity of reviewing asset allocation to align with financial goals and timelines, especially as retirement nears [2] - It introduces the concept of required minimum distributions (RMDs) and suggests that Roth conversions can help manage these distributions and associated tax implications [6][7] - It also mentions the potential tax consequences of Roth conversions and the importance of timing these conversions based on income levels to avoid higher Medicare premiums [8] Diversification and Flexibility - The article encourages diversifying assets by considering taxable investment accounts, which are not subject to RMDs, as a viable strategy for retirement savings [9] - It suggests exploring various savings strategies beyond traditional investments, such as laddered CDs, annuities, and high-yield savings accounts for emergency funds [11] - The importance of understanding the retirement income plan is emphasized, including strategies for managing RMDs and tax implications through careful withdrawals from different accounts [12][13]

A 401(k) is designed for retirement savings, so you’ll often face IRS penalties if you withdraw funds before age 59 1/2. In addition to a potentially hefty tax bill, your money will miss out on the potential to grow since it’s no longer invested. We’ll take a deep dive into 401(k) withdrawals and 401(k) loans in this article. You’ll learn the rules and the differences between withdrawals and loans, as well as how a 401(k) loan or withdrawal can affect your retirement planning. Learn more: What is a 401( ...

The passing of a loved one creates emotional and financial challenges. The situation gets trickier when an inherited IRA is involved, and you are listed as a beneficiary. The tax rules on inherited IRAs are complicated, and mistakes can be costly. Try giving yourself a head start on managing your inheritance wisely by following the five steps below. Learn more: What is an IRA, and how does it work? Step 1: Learn the IRA vocabulary The language of retirement accounts can be confusing. Refreshing your k ...

Core Insights - The article discusses the benefits and considerations of converting to a Roth IRA, particularly for individuals nearing retirement age, highlighting the tax implications and growth potential of such a strategy [1][5][19] Contribution Methods - There are two primary methods to fund a Roth IRA: conversions from pre-tax accounts like 401(k)s or traditional IRAs, and contributions from earned income. The contribution limit for 2025 is $7,000 annually, or $8,000 for those aged 50 or older [3][4] Tax Implications - Converting funds from a 401(k) to a Roth IRA increases taxable income for the year of conversion. For example, a conversion of $15,000 raises taxable income from $50,000 to $65,000, resulting in an increase of approximately $3,300 in federal taxes [1][8][22] Growth Potential - A $15,000 investment could grow significantly over 40 years, potentially reaching $224,000 at a 7% return or $653,000 at a 10% return. This illustrates the long-term benefits of paying taxes upfront on a smaller balance [8][10] Retirement Planning - For individuals aged 58 with substantial 401(k) balances, the decision to pivot to Roth contributions involves balancing current tax payments against future tax-free withdrawals. This strategy can provide predictable income and may reduce lifetime tax costs [15][19][25] Estate Planning Benefits - Roth IRAs offer advantages for estate planning, as they do not require minimum distributions during the owner's lifetime, allowing funds to grow longer. Beneficiaries can withdraw inherited Roth funds tax-free within 10 years, making it a valuable tool for wealth transfer [14][20] Income Eligibility - In 2025, income limits for Roth IRA contributions phase out for single filers earning between $150,000 and $165,000, and for joint filers between $236,000 and $246,000. However, conversions are not subject to these limits but incur immediate tax liabilities [22][23] Strategic Considerations - Late-life Roth contributions may not replace the primary role of a 401(k) but can create a tax-free reserve. The decision to convert should consider tax brackets, other income sources, and legacy planning goals [23][25]

Core Insights - The article discusses the importance of creating a balanced withdrawal strategy from retirement accounts to ensure financial stability during retirement [2][3] - It highlights the tax implications of different retirement accounts, specifically traditional IRAs and 401(k)s, compared to Roth IRAs [4][5][6] - The article emphasizes the necessity of planning for Required Minimum Distributions (RMDs) starting at age 73 for pre-tax retirement accounts [8][9] Tax Implications - Traditional IRAs and 401(k)s are funded with pre-tax dollars, meaning withdrawals are taxed as ordinary income during retirement [4][6] - Roth IRAs are funded with after-tax dollars, allowing for tax-free withdrawals in retirement [5] - Social Security benefits may also be taxable, with up to 85% of benefits potentially subject to tax depending on total income, which can increase the overall tax burden when combined with withdrawals from pre-tax accounts [7] Required Minimum Distributions (RMDs) - RMDs begin at age 73 for individuals with pre-tax retirement accounts, requiring separate calculations for each account [8] - The RMD amount is determined based on the account balance as of December 31 of the previous year and a divisor from the IRS Uniform Lifetime Table, which is 26.5 for those aged 73 [9]

Core Insights - The 2025 tax year is approaching its end, and proactive planning can help reduce tax liabilities and enhance savings [1] - Taxpayers are expected to pay more upfront in 2025 but receive larger refunds in 2026, with an estimated average refund of $3,743, reflecting a 17% increase from 2025 [2] Tax-Saving Strategies - Contributions to retirement plans and college savings accounts must be made by December 31, with a contribution limit of $23,500 for 401(k) or 403(b) plans in 2025, plus an additional $7,500 for those aged 50 or older [4][5] - For individuals aged 73 or older, December 31 is the deadline for taking required minimum distributions (RMDs) to avoid penalties [6] Investment Strategies - Tax-loss harvesting allows investors to sell underperforming assets to offset capital gains, with up to $3,000 of remaining losses applicable to ordinary income each year, and any excess losses can be carried forward [7] - The wash-sale rule, which prevents repurchasing substantially identical investments within 30 days of sale, currently does not apply to cryptocurrencies [8] Itemization Considerations - Less than 10% of taxpayers itemize deductions, but it may be beneficial if deductions exceed the standard deduction of $15,750 for single filers and $31,500 for married couples in 2025 [9]

Core Insights - Many individuals overlook the importance of a retirement withdrawal strategy, which is essential for effectively managing assets during retirement [1] Withdrawal Strategy Overview - A retirement withdrawal strategy is crucial for covering expenses in retirement, and it is simpler to plan when there is a single retirement account [3] - The order and proportions of withdrawals from retirement accounts can significantly affect tax liabilities and the longevity of retirement savings [3][8] Required Minimum Distributions (RMDs) - Individuals must start making withdrawals from defined contribution plans at age 73, with the age increasing to 75 for those born in 1960 or later [4] - Failing to take an RMD can lead to substantial penalties from the IRS [5] Withdrawal Order Recommendations - A suggested withdrawal order is to first draw from brokerage accounts, followed by tax-deferred accounts, and finally tax-free accounts [6] - This strategy aims to minimize tax liabilities while maximizing the longevity of retirement savings [8] Case Study: Don and Nancy - A hypothetical couple, Don and Nancy, both aged 67, receive $1,500 monthly in Social Security, totaling an annual income of $36,000, alongside $1 million in retirement accounts [9]

Core Insights - Roth IRAs provide significant advantages such as tax-free withdrawals and no required minimum distributions (RMDs), allowing for long-term investment growth [2][3][24] - The main disadvantage of Roth IRAs is the upfront tax payment on contributions, which can reduce the capital available for long-term growth [4][5][24] - The decision to switch to Roth contributions depends on individual financial circumstances, particularly tax brackets and retirement expectations [17][21][24] Advantages of Roth IRAs - Roth IRAs allow for tax-free withdrawals in retirement, which can be beneficial for retirees [6][24] - They help maintain lower taxable income, potentially keeping Social Security benefits taxes low [2][24] - Contributions to Roth IRAs can grow tax-free over time, maximizing growth potential [2][24] Disadvantages of Roth IRAs - Upfront taxes on contributions can limit the amount available for investment [4][5] - Households in higher tax brackets may find traditional pre-tax accounts like 401(k)s more beneficial [18][21] Contribution and Conversion Strategies - There are two main ways to fund a Roth IRA: contributions and conversions from pre-tax accounts [8][9] - Contributions are subject to annual limits, while conversions have no limits but can significantly impact taxable income for the year [10][12] - Both contributions and conversions are subject to a five-year rule for tax-free withdrawals [12][13] Financial Planning Considerations - Households should evaluate their current and expected future tax rates when deciding between Roth contributions and traditional accounts [17][21] - Consulting with a financial advisor is recommended to tailor strategies to individual financial situations [14][23]