Building Wealth Over Generations
Over the past several months, we’ve had a number of questions from clients that all had something to do with building family wealth across multiple generations. They include questions about how to help children begin to save, how to make gifts to family members, and how to handle an inheritance, particularly how the new complex rules around inherited IRA’s work.
Roth Accounts: You may have children or grandchildren that are just starting to earn money in summer jobs or are early in their career and would like to begin saving for their future. One of the best ways for young people to accumulate wealth is to open a Roth IRA and invest after-tax contributions in a target date investment fund. To contribute to a Roth IRA, they must have earned income such as wages or self-employment income equal to or greater than the amount they contribute. Teenagers and early career adults are likely in the lowest tax brackets, so they won’t miss a big tax benefit by making after-tax contributions to a Roth. Investing in a target date fund should give them good growth opportunity to accumulate wealth over their long investment horizon. If the Roth account grows as expected, they will have access to funds in the future that can be withdrawn tax-free when they are likely to be in a higher tax bracket. In the meantime, if they need access to money in an emergency, they can access their contributions without tax or penalties (note that earnings withdrawals may be subject to tax and penalties in certain circumstances).
Gifting: Many of our clients have asked about the best way they can help their children with large expenses like buying a car or house. Before writing a large check to your children, you should be aware of the gift tax rules. First, there are many expenses that you can cover that are not subject to gift tax such as education expenses, medical bills, and vacations where you invite your kids to join you. However, writing a check to help a loved one buy a house may create a gift tax issue. You can give up to $19,000 in 2025 to anyone you like without being subject to gift tax. For a husband-and-wife gifting to a married child, you have an opportunity to give $76,000 by each of you gifting $19k to your child and another $19k to your child’s spouse. If you give more than that amount, you may not have to pay gift tax, but you would have to file a gift tax return and the amount over the $19k exemption will reduce your lifetime gift and estate tax exemption. More than any tax that might be due, the reporting and record keeping is something that most people would like to avoid.
Inherited IRAs: A third area of family wealth that is impacting many clients in 2025 is the newly implemented rules for required minimum distributions (RMD’s) on inherited IRAs. The Secure Act 2.0, which Congress passed in 2022, requires most non-spouse beneficiaries of IRA’s to fully distribute the IRA assets within 10 years. The rules also require that you take minimum distributions in each of those 10 years in many cases. Because the law was confusing, the IRS kept delaying implementation of the inherited IRA rules until this year. So, 2025 is the first year that inheritors of IRAs must take the minimum distribution. Unfortunately, when inherited IRA assets are distributed, you as the beneficiary will have to include the distributed assets in your taxable income. If you are still employed or have other income that puts you in a higher tax bracket, you may end up paying more tax than would have been the case if the original IRA owner was still alive and taking distributions.
There are two strategies to consider to manage the tax on inherited IRAs. First, for an IRA that you inherit, you will want to project your tax bracket over the 10 years that distributions have to be made. While you may have to take a minimum distribution, there may be low tax rate years where taking a larger distribution will be advantageous. If you wait until the 10th year to distribute the bulk of the IRA, you may find yourself in a higher tax bracket with less after-tax proceeds from the inheritance.
The second strategy to consider is to convert traditional IRA investments that you own into a Roth IRA in low tax bracket years. This will mean that your heirs inherit a tax-free asset. While they will still have to distribute all the assets in the Roth by the 10th year, they won’t have to make RMD’s, and all distributions will be tax-free. Again, you will want to project your tax bracket over a number of years and do Roth conversions in years where your tax rate is as low as possible.
Multi-generational wealth building has many variables to consider. For example, instead of just worrying about your tax bracket, you need to consider tax brackets for family members over a number of years (even beyond your life expectancy). Doing this accurately requires sophisticated software to project taxes over many years.
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