Financial Advisor Q&A: How to navigate the Great Wealth Transfer

By Tim Grant / Pittsburgh Post-Gazette

As trillions of dollars shift from one generation to the next in the largest wealth transfer in history, financial advisors like Newlin Archinal are at the forefront, helping wealthy clients navigate this massive financial shift.

Formerly a TV news anchor for Channel 11, Ms. Archinal, co-founder of 4Rivers Wealth Management in Green Tree, advises high net-worth individuals on everything from estate planning to the changing rules around inherited retirement accounts.

With recent changes to retirement planning brought on by Secure Act, non-spousal heirs no longer have the luxury of spreading out the distribution from an inherited retirement account over their lifetime. The new rules mandate inherited 401(k)s and IRA accounts be liquidated within 10 years.

In this Q&A, which has been edited for length, Ms. Archinal breaks down how these changes are reshaping the financial landscape for her clients.

Q: The rules have changed for inherited retirement accounts due to the Setting Every Community Up for Retirement Enhancement (SECURE) Act and its latest incarnation, SECURE 2.0. What is important to know about the rule change?

A: One change that has been challenging for our private clients is the loss of the stretch IRA feature for inherited IRAs. Before the Secure Act, a non-spousal beneficiary could stretch out the Required Minimum Distribution (RMD) from an inherited IRA over their lifetime. Post Secure Act, non-spousal beneficiaries are now required to withdraw the entire balance of the account by the 10th anniversary following the calendar year of the original IRA owner’s death.

Here’s an example. Your father passed away in 2023 and left you an IRA. You aren’t a spouse, or a minor child, so the 10-year rule applies to you. Under the 10-year rule, you’d have to start taking required withdrawals right away and paying income taxes on them.

Do heirs have to withdraw money from the retirement account each year or can they take all of it in a lump sum at any point?

Since 2020, there has been some confusion as to whether beneficiaries had to take annual withdrawals (including years 1-9) over the 10-year period or wait and take one lump sum in the final year. They made a ruling this year saying there’s no penalty going backward, but starting in 2025, if you had a parent who passed in 2024, starting next year, you are required to take money out every year and then have that account drained by the end of the 10th year.

How does this mostly affect your clients?

Our high net-worth clients are also high-income earners. The new rules around withdrawals could push some clients into higher [tax] brackets. I am working with a client right now who inherited a $1 million IRA this year. Does he need the income? No. However, the taxes on withdrawing the account in one lump-sum are too onerous. For now, we’re advising he fill his tax bracket annually to smooth out the tax liability over the next ten years.

What are some strategies that you suggest for heirs who are concerned about getting bumped to a higher tax bracket?

If one spouse isn’t fully maxing out their employer-provided retirement plan, or 401(k), maybe reduce some income there. Is there a Health Savings Account [HSA] availability? Maybe do the HSA and fully fund that. And we just keep looking. Maybe we look for ways to do charitable contributions for the year to try to reduce income.

Is the Great Wealth Transfer what’s driving these new rules around retirement planning?

The Great Wealth Transfer is the fact that an anticipated $84 trillion will be transferred to heirs until the year 2045, as baby boomers start to pass on wealth.

Sometimes it’s helpful when parents share what their wealth looks like with their adult children so they can plan for it. And also ensuring that beneficiary forms are filled out correctly. If they’re not and there’s any discrepancy, if somebody were to put those assets into an estate, the IRS has said if an IRA gets reverted to the estate, it’s a five-year rule [for liquidation], not a 10-year rule.

Surviving spouses can still stretch inherited IRA throughout their lifetime. Are there other exceptions?

The annual withdrawal run does not apply to inherited Roth IRAs. So, a non-spouse beneficiary can wait until the 10th year to withdraw the entire account balance.

Also, the penalty for not taking required minimum distributions is 25% of the amount that should have been withdrawn.