Legacy Planning: Keep Taxes in Mind

If you're nearing retirement, you may have two major planning concerns. One is determining how much income you'll need and where it will come from. The other is creating a tax-efficient plan for passing along your assets. If one of your goals is to leave a financial legacy to your family or your favorite charity, you'll want to design a strategy that takes taxes into account.

Expenses and Income

How much money will you need to live on in retirement? In addition to your current living expenses, you may need funds for unanticipated expenses, such medical or long-term care costs. Social Security, pensions and annuities are stable sources of income that you can supplement with retirement plan withdrawals, the sale of investments, and savings.

Your Accounts

Confirming that your accounts are titled appropriately and beneficiary designations are up to date can help ensure that your assets will pass to your beneficiaries as you intend and receive favorable tax treatment. Review designations periodically, especially if your intentions or tax laws change.

Your Strategy

You may be tempted to preserve the assets in a traditional IRA or qualified retirement plan account for your heirs and withdraw funds for living expenses from taxable investment accounts to take advantage of lower capital gains rates. But that strategy could leave your heirs with a large tax bill. Why? Withdrawals from a traditional IRA or qualified retirement plan account are taxed at ordinary income tax rates. However, appreciated assets, such as stocks, generally receive a step up in basis at the owner’s death, so any appreciation since you acquired the investment won’t be taxable to your heirs. (This benefit may be limited in the future.)

A Work Around

Consider converting all or a portion of the money in a traditional IRA or qualified retirement account to a Roth IRA. Make sure you have other assets to pay income taxes on the conversion.

Being Charitable

Naming a charity as the beneficiary of a qualified retirement plan account or traditional IRA allows the organization to receive the assets tax free. Your estate may also receive an estate tax deduction for the donated assets.