Wealth Planning Update | Q2 2024

In this quarterly update, our team is excited share recent changes impacting inherited IRA distributions as well as provide value added wealth management strategies to assist you in all facets of your financial life.

What’s New with Inherited IRAs

Following the enactment of the SECURE Act 1.0 in January 2020 and its follow-up guidance, inheriting an IRA as a non-spousal beneficiary, became even more nuanced and complex. A cornerstone to that initial legislation was the introduction of the non-stretch feature: the inability to extend RMDs over a non-spousal beneficiary’s lifetime. As a result, the newly instituted 10-year rule was born.

To that end, calculating the Required Minimum Distribution (RMD) amounts from these inherited IRAs came with their own challenges and ambiguities; key factors had to be considered – such as the type of IRA inherited, the age of the original account holder at the time of death, and the relationship of the beneficiary to the deceased.

The IRS issued new guidance (Notice 2024-35) recently to clarify questions regarding the 10-year payout period where most non-spousal IRA beneficiaries are required to fully distribute the balance by 12/31 of the 10th year following the year the original account owner died. One of the most important takeaways was the relief offered:

Keep in mind that this IRS guidance does not affect lifetime RMDs (i.e., from Traditional IRAs), RMDs from inherited IRAs by ‘eligible designated beneficiaries,’ which include surviving spouses, children of the deceased who are minors, a disabled or chronically ill person, anyone who is not more than 10 years younger than the deceased original account holder, and select trusts, or RMDs by beneficiaries who inherited the accounts pre-2020. If decedent passed away before January 1st, 2020, the old ‘stretch IRA’ rules apply.

For many of our clients, this translates to another year of needing to devise a tailored tax planning strategy to determine whether to take a distribution (partial or full) or skip the withdrawal for this year altogether given the ordinary income tax impact. Tax bills triggered can potentially have unintended consequences related to being placed in higher marginal tax brackets as well as adverse effects to Medicare premiums.

Your Main Street Research Private Client Advisor & service team will work with you as we head into the second half of the year to discuss these available options in more detail. As always, we strongly encourage consulting your tax professional, CPA, or enrolled agent in partnership with your private client advisor to implement a tax strategy that works well for you and your family. Additionally, beneficiaries should review IRS publications and guidelines related to inherited IRAs for specific details based on their individual circumstances.

The Benefits of Consolidating Your Investment Accounts

As investors, one of the biggest challenges we face is maintaining a cohesive, well-coordinated investment strategy across multiple accounts and providers. Over time, it's common for individuals to accumulate a mix of 401(k)s, IRAs including inherited IRAs, brokerage accounts and other investments with different brokerage firms. However, this fragmented approach can make it difficult to properly manage risk, asset allocation, diversification and tax efficiency across your full portfolio.

Unified Investment Strategy & Improved Asset Allocation

With accounts held across multiple providers, implementing a consistent, tailored investment approach becomes extremely challenging. Each account may have its own allocation targets, security selections, and rebalancing needs based on different models or strategies.

By consolidating under one asset manager, you ensure a unified, thoughtfully constructed investment strategy implemented holistically across your full portfolio. Your dedicated advisor can develop an overarching asset allocation tailored to your specific goals, risk tolerance and time horizon. Security selection, portfolio construction and ongoing rebalancing can all be coordinated centrally rather than operating in silos. This unified approach helps avoid unintended overlapping of security holdings, gaps or other misalignments in your total portfolio.

For example, you may have a targeted 60/40 equity/fixed income split for your portfolio. However, with accounts scattered, you could inadvertently end up 70% in equities when aggregated. A comprehensive view creates seamless and consistent rebalancing opportunities to maintain your desired asset allocation. This comprehensive perspective is critical as your goals and circumstances change over time. Your advisor can analyze your consolidated holdings to ensure proper diversification and alignment with your overall targets.

Enhanced Tax Strategy

Managing investments through a single advisor allows for improved tax planning and harvesting opportunities across all your accounts. Realized capital gains/losses, diversification using varied account types and securities held in such accounts, as well as income generated can be evaluated collectively each year to optimize tax efficiency and minimize tax liabilities. Your advisor can implement strategies such as uncovering less efficient assets in tax-advantaged accounts, engaging in tax-loss harvesting, and considering gains/losses to potentially improve your after-tax returns. With a fragmented approach, these opportunities are often missed when looking at each account separately.

Simplified Performance Tracking & Reporting

Producing clear reporting becomes far more straightforward with a consolidated portfolio picture and when using a consistent approach to performance with an apples-to-apples benchmark against appropriate indices. Rather than attempting to aggregate disjointed statements and data sources, your advisor can provide transparent, easy-to-understand reporting on your total portfolio's performance, allocations, and progress towards your goals. This level of clarity allows for more productive performance reviews and informed decisions about adjustments that may be needed over time.

Cohesive Wealth Management

Finally, consolidating with a single, experienced asset manager allows your investment plan to be seamlessly incorporated into a cohesive and comprehensive wealth management strategy. Your dedicated advisor can coordinate all aspects of your financial life – investments, taxes, retirement, estate, insurance, charitable giving, etc. – through a centralized, goals-based lens. This level of coordination is critical to ensure all components of your wealth plan are working in concert. Your advisor can collaborate with other professional partners (CPAs, attorneys, etc.) to deliver truly personalized and integrated wealth management advice tailored to your unique situation.

At Main Street Research, our experienced advisors have the expertise to evaluate your current portfolio and construct a thoughtful strategy to consolidate and aligned with your near- and long-term goals. We can help simplify your financial life, provide greater clarity into your full portfolio, and implement a unified, cost-efficient, tax-aware approach going forward. If you have investment accounts outside of Schwab or our management, we encourage you to schedule a consultation to discuss the potential benefits of consolidation. Regaining control, maximizing returns, minimizing costs and fully coordinating all aspects of your wealth plan is our top priority.