The Incredible Roth IRA Part 2 - Multigenerational Planning

Today we dig into another aspect of Roth IRA’s – the multi-generational impact.  Not only can the Roth improve your outcomes, it can be a significant tool for wealth transfer.  In this episode, we show you the impact this can have…Spoiler alert, it CAN be significant. 

Watch Now - The Incredible Roth IRA Part 2 - Multigenerational Planning

Meet the Jetsons...

Last week we met the Jetsons, George and Jane.  Their children, Elroy and Judy will eventually inherit the assets that remain at George and Jane's death.  To see the assumptions used in this illustration, please click here.  For the purpose of today's episode, we are assuming George and Jane pass away at 83 and 85 respectively.  (Please note, this is not representative of an actual client experience or real-life situation.  It is for illustrative purposes only.)

Watch Part 1

The Multigenerational Impact - Part 1

The first way George and Jane's children are going to benefit reflects the total size of their inheritance.  Below we illustrate the potential differences in the balances of the accounts remaining at Jane's death.  

At the end of Jane's life, Judy and Elroy look to inherit nearly $236,000 more if their parents begin using the Roth provisions in their 401k's.  This is the first major impact.  But why are the ending values different?  

Required Minimum Distributions

When George and Jane reach age 75, they must begin taking distributions from their pre-tax retirement accounts.  These are required minimum distributions.  Under current rules, they must take that amount and pay taxes on it even if they don't need for their regular spending.  They can always reinvest what they don't need, but in this example, we are assuming the excess is spent.

The Rule Change

The SECURE Act, passed in late 2019, created some major changes in the retirement planning landscape.  One of the most significant rule changes involved how a non-spouse beneficiary handles an IRA account when they inherit it.    

Under the previous rules, a non spouse beneficiary was able to spread the distributions and taxes from an inherited IRA over their remaining life expectancy. This means you looked up your age in the IRS table and had that many years to liquidate the account.  For example, a 50-year-old had 36 years to liquidate an inherited IRA.  Now a non-spouse beneficiary must liquidate the account within 10 years.  

The rules surrounding required distributions from an inherited IRA are complicated, and we would encourage you to contact us to discuss specifics.  For this example, we assume Elroy and Judy withdraw 10% of the funds each year.  Their additional income will be taxed at 24% at the federal level and 6% at the state level. Here is the difference between the two scenarios.

Is this too good to be true?

Keep in mind this is a simulation built on assumed rates of returns, spending levels, and current tax rates.  A lot of the benefit we are illustrating is also a function of compounding returns over 40+ years as well.  In shorter time frames, this is going to look much different.  But under current rules, this projection isn't far-fetched, either.  In the proper context, the long-term benefits of using Roth accounts can have a powerful impact.

Minimizing The Share of Our Silent Partner

Whether we like it or not, the government is our silent business partner.  They are going to share in our success as earners and as savers.  The idea of paying more tax today to benefit our kids doesn't always sit well with some.  But seeing numbers like the ones we illustrated above can be eye-opening.  We haven't met too many people who would rather the government get more of what they have earned than their family.

The end goal in these situations is to maximize what goes to your loved ones and minimize what goes to the government.   

How can Roth IRAs impact you and your family?

Remember this is a somewhat simplified illustration.  It is built on common elements we see when we work with our clients.  But your situation will have its own unique circumstances.  We can incorporate that into a financial plan and show you how this could impact you and your family.  Get started by completing the form below.