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Taxes for Heirs

Taxes don’t stop at your passing. Some — like estate tax and even income tax — are actually triggered when you die. Under the current tax code, estate tax only comes into play if you have more than $11.4 million in assets, so it doesn’t apply for most of us.

But income tax is dependent upon the type of account that is inherited and whether beneficiaries have been named. Many retirees believe that their estate planning is done because they have a will. But that’s not necessarily true. Beneficiary forms for IRA and 401(k) accounts take precedence over a will. In 2009 there was a Supreme Court case where a deceased man’s daughter argued that she, not his long-divorced wife, should get his retirement plan dollars. The ex-wife even waived her claim to the funds during the divorce. But the court ruled unanimously that, because the beneficiary form was never changed to remove her as sole beneficiary, she got it all. Beneficiary forms are filled with landmines; one wrong move or one missing contingent beneficiary can trigger unnecessary taxes.

Legacy & Estate Planning

At Marsh Wealth Management, we work with well-established estate planning attorneys to ensure that your assets are titled properly to avoid probate and ensure your legacy will be tax-efficiently distributed to your loved ones. With your permission, we can communicate directly with your attorney, making sure that your wills, financial powers of attorney, and medical powers of attorney are safely in place. Learn more about legacy and estate planning.

Tax Optimization

Did you know that all of your 401(k) and IRA account balances don’t belong to you? It’s true! Since you haven’t yet paid taxes on these assets, part of your account is an embedded tax liability that belongs to Uncle Sam. 

For example, if you’re in the 24% tax bracket, for every $10,000 in retirement savings you withdraw, you only get to spend $7,600 while the IRS gets the other $2,400. That $500,000 you might have saved is only worth $380,000 after you subtract the tax liability.

On the other hand, what if some smart, proactive tax planning puts you in the 12% tax bracket? Now you’re getting to spend $8,800 of every $10,000 you withdraw, and your $500,000 is worth $440,000 toward maintaining your lifestyle.

It's not what you earn. It's  what you keep. 

​Do you have a burning question about retirement planning? Send it to us, and we’ll answer it for free.

Schedule a no-obligation consultation (in person, by phone, or over Zoom). Contact us now.

Interested in a tax-optimized financial plan?

Marsh Wealth Management has been proactive in advising me of strategies to address proposed income and estate tax law changes. Marsh has also provided valuable advice regarding fixed index annuities and long term care insurance.  

Richard R.

The testimonial above was provided by a non-compensated current client who has no conflicts of interest.

Tax Planning

Clearly, knowledge of tax strategies is a key component of a successful retirement, but few people want to spend their hard-earned retirement years reading the tax code. Even fewer will be able to make sense of it. This is not do-it-yourself territory.

The skilled CPA-fiduciary team at Marsh Wealth Management is well versed in Roth IRA strategies, tax-efficient order of withdrawals, RMD and QCD rules, legacy tax planning, and more. We can give you tax advice in conjunction with proactive tax planning, a combination that typical investment advisors cannot provide.

We naturally weave tax optimization into your customized financial plan in a variety of ways. Some strategies are simple; some are more complex. But all share the goal of minimizing your taxes. Because you shouldn’t pay any more in taxes than you have to.

The Tax Trap

In the years leading up to retirement, it’s important to build multiple types of savings: taxable, tax-deferred, and tax-free. Don’t fall for the trap of putting all of your savings into the tax-deferred bucket; you will be shocked down the road with high taxes in retirement. Use a mix of taxable brokerage accounts, tax-deferred retirement accounts, and tax-free Roth and Health Savings Accounts. For higher income earners who may not be able to contribute to a Roth IRA, you can look to permanent life insurance to create similar tax-free streams of income in retirement.

Marsh Wealth Management Strategies for Tax Optimization

  • Use tax-managed investments in taxable accounts to limit the impact of dividend, interest, and capital gain distributions on your tax return.

  • Create a balance among taxable, tax-deferred, and tax-free assets.

  • Identify your tax-efficient order of withdrawal to fund your retirement lifestyle.

  • Create proactive multi-year Roth IRA conversion strategies to build tax-free assets.

  • Proactively minimize the tax on IRA Required Minimum Distributions.

  • Maximize your ability to itemize deductions with “bunching” techniques.

Strategic Partnerships

To ensure that your tax strategies are properly reflected on your tax returns, we have a strategic alliance with Amelse and Edmonds CPAs, in Knoxville, TN who provide a depth of experience in tax return preparation. With your permission, we are able to communicate with them directly regarding your unique tax strategy. This gives you a collaborative and cohesive team working proactively on your behalf.

Planning in Case of Rising Taxes

Higher taxes in the future could significantly reduce your spendable income in retirement. The current tax rates that went into effect with the Tax Cuts and Job Act of 2017 will expire in 2025. The expiration of these lower tax rates is already in the current law, so unless Congress takes significant action before then, rates will reset by default to the previous higher ones.

Despite a ballooning national debt, it is unlikely that Congress will cut spending on social safety net programs like Social Security, Medicare, and Medicaid, especially when 10,000 baby boomers retire every day, putting more pressure on these programs. The likely scenario? Increased taxes. Unknown future tax increases could eat into your retirement savings, using up your money faster than you expected and forcing you to cut back on your lifestyle.

How Taxes Affect Distribution in Retirement

Once you get to retirement, there are proactive, often-overlooked ways to manage your tax bill. Marsh Wealth Management can help you determine the most tax-efficient order of withdrawals. There is a science around knowing which type of account to withdraw from, in which year, to minimize your taxes.

Another tax hit is the Required Minimum Distribution (RMD), which goes into effect at age 73 if you were born between 1953 and 1959, or age 75 if you were born in 1960 or later. With RMDs, the IRS dictates how much MUST be withdrawn from your retirement accounts as taxable income. Planning for this tax milestone is imperative.

to help you enjoy your retirement with confidence

We immediately felt the personalized approach to financial planning provided by Marsh Wealth Management was the right fit for us. In our first meeting, Yvonne took the time to really understand our life priorities and guided us through the key decisions for securing the financial future we desire. Forming this close relationship made it easy to trust and value all aspects of their services, such as investment management, long-term care planning, and tax preparation.

Jon C.

The testimonial above was provided by a non-compensated current client who has no conflicts of interest.

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