There is much being written today about the “great wealth transfer.” What it refers to is a massive shift in assets from the aging Baby Boomer generation to their children, who are primarily of the Millennial generation. In this blog, we’ll take a look at some of the issues involved in the transfer.
Baby Boomer Wealth
Baby boomers are still the most significant generation when it comes to wealth, primarily because of historical circumstances. They began their careers in an economy that provided them with a relatively low-cost education followed by the strong availability of jobs and affordable housing. Because of a variety of socioeconomic and environmental factors, Baby Boomers were able to build wealth in a way no other generation before them had.
Millennials, on the other hand, saw an unprecedented spike in the cost of education, and many of them are still saddled with student loan debt even into middle age. Home prices soared, as well, shutting many of them out of home purchases. The result is millennials often have far fewer assets than their parents did at the same age. The coming wealth transfer should be a massive, long-term financial opportunity to restore personal financial health.
So Where Is the Shift Originating?
As Baby Boomers continue to age, many will sell massively appreciated homes to downsize and reduce their expenses with less travel and mobility, all while continuing to grow their wealth through various investment vehicles. The oldest Boomers are reaching a fairly advanced age, meaning that their passing is the start of the largest generational wealth transfer in history. This wealth is in the form of a variety of inherited assets, such as retirement accounts, taxable brokerage accounts, annuities, personal property, real estate, life insurance, and much more.
What Are the Tax Implications?
As the transfer of wealth takes place, the government will effectively shift the tax burden (as well as tax revenue) from Baby Boomers living on a fixed income at a lower marginal tax rate to millennials in the prime earning phase of their careers. The result is that Millennials may face an enormous tax burden particularly when it comes to inheriting pre-tax assets.
Prior to 2020, the beneficiaries of inherited IRAs or similar plans such as 401ks, were able to transfer money into an inherited IRA and elect to “stretch” the distributions over their lifetime. This allowed them to minimize, or stretch the distributions and subsequent tax burden out over many years.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 essentially eliminated the inherited IRAs stretch election. Under the new legislation, heirs of pre-tax assets have only two options: they can take a lump sum distribution and pay all the taxes at once, or transfer the money to an inherited IRA. If they choose the latter, the funds must be withdrawn and taxed over 10 years following the death of the decedent. Both these options increase the tax burden.
Minimizing the Tax Burden
There are tools that can be used to minimize the tax burden, and the best place for guidance is with a professional financial advisor and tax firm. Toomey Investment Management, Inc. is a Wallingford, Connecticut-based financial advisory company that offers clients expertise in portfolio management.
At TIMI, our business model is designed to treat all of our clients equally and fairly. We realized long ago that the financial industry dedicated many resources to capture money from prospective clients but much less on service and accountability for existing clients. At Wallingford, Connecticut-based TIMI, we listen carefully, keep in touch, and return your calls and communications quickly, so you can count on us. We will work effectively to optimize your financial situation and solve your problems. Call us at 203-949-1710 or visit our website for more information.