With the median IRA or self-employed Keogh balance rising to $87,000 in 2022, retirees are facing tax issues as their retirement savings grow. While it is generally positive to see larger balances in retirement accounts, the increase in pretax IRA balance has the potential to create a tax nightmare for retirees. Certified financial planner Derek Williams warns that this could have significant implications for retirees as they reach the age of required minimum distributions.

As pretax balances in IRAs continue to grow, retirees can anticipate larger required minimum distributions. These distributions can trigger tax consequences such as higher premiums for Medicare Part B and Part D. With changes enacted by Secure 2.0, most retirees now need to begin required minimum distributions by age 73, which will be extended to age 75 in 2033. The postponement of these mandatory withdrawals by Congress only serves to further increase pretax balances and potentially lead to larger RMDs later on.

In order to reduce tax liabilities in retirement, some financial advisors recommend Roth conversions for retirees. This strategy involves transferring pretax or nondeductible IRA funds to a Roth IRA, particularly during lower- years. While there is an upfront tax on the converted balance, it can help to lower future taxes and mitigate the impact of growing IRA balances.

Not only do retirees face tax challenges with growing IRA balances, but their children who inherit these assets may also encounter tax issues. Recent changes to tax laws have made pretax IRAs less desirable assets to inherit, as heirs are now required to empty inherited IRAs within a 10-year window. This differs from previous regulations that allowed heirs to stretch IRA withdrawals over their lifetime, resulting in lower yearly taxes. With the potential for significant tax implications, adult children inheriting IRAs could see a substantial portion of their inherited pretax accounts eaten away by taxes.

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As IRA balances continue to grow for retirees, there are several tax implications that need to be considered. From required minimum distributions triggering tax consequences to like Roth conversions to mitigate tax liabilities, retirees must carefully plan for the impact of their growing retirement savings. Moreover, adult children who inherit these assets may face challenges in managing the tax consequences of inherited IRAs. It’s crucial for both retirees and their heirs to be aware of these potential tax pitfalls and consider proactive measures to address them.

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