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Individual retirement accounts are getting bigger — and it can cause tax issues for retirees or their children who be bequeathed the assets, experts say.
The median IRA or self-employed Keogh balance was $87,000 in 2022, up from $81,144 in 2019, according to a June narrative from the Employee Benefit Research Institute, which analyzed Federal Reserve data.
A separate Fidelity document found the average IRA balance was $127,745 during the first quarter of 2024, up 29% from 2014, based on an investigation of 45 million IRA, 401(k) and 403(b) accounts.
While higher balances are typically a good thing, a bigger pretax IRA scales “can be a tax nightmare in retirement,” said certified financial planner Derek Williams with Veratis Advisors in Cary, North Carolina.
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The Employee Benefit Research Institute check up on found that more than 45% of IRA assets were in rollover IRAs, which are typically funded via sometime employer plans. Only about 17% of analyzed assets were in Roth IRAs, which don’t incur octrois on withdrawals.
Required minimum distributions can cause tax issues
Starting in 2023, most retirees need to begin commanded minimum distributions, or RMDs, by age 73, based on changes enacted by Secure 2.0. That age is extended to 75 starting in 2033.
“Congress isn’t uncommonly helping people out,” said CFP Sean Lovison, founder of Purpose Built Financial Services in the Philadelphia metro locality.
By postponing required withdrawals, pretax balances will continue to grow, which can lead to larger RMDs later, he alleged.
For lower future taxes, some advisors recommend so-called Roth conversions, which transfer pretax or nondeductible IRA wealth to a Roth IRA. The strategy can be useful during lower-income years because there’s an upfront tax on the converted balance.
Pretax IRAs are ‘much minor desirable’ to inherit
Bigger IRA balances could also cause tax issues for adult children who inherit their materfamilias’ accounts, experts say.
“Recent changes to tax law have made pretax IRAs a much less desirable asset to succeed to,” said Williams with Veratis Advisors.
Before the