As of the second quarter of 2024, Americans had $40 trillion in pre-tax retirement accounts, such as 401(k) plans, 403(b) plans and IRAs, according to the Investment Company Institute. These accounts are fully taxable at ordinary income tax rates to either the owner or the inheritor of these accounts.
Under current law, once a pre-tax account owner is age 73, they’re required to begin taking required minimum distributions (RMDs) for life or until the account is depleted. As a financial adviser since 1996, I’ve typically seen one of two scenarios unfold: Some individuals withdraw funds, pay their taxes and spend the money. Others invest the withdrawn funds in another tax-deferred or taxable account, which either increases their own taxes or defers additional taxes for their heirs. I refer to this as The Tax-Deferred Disconnect.
