Estate and Income Tax Preparation in the New Year

Tax-Smart Strategies for Your Estate and Retirement in the New Year

As the new year approaches, it’s the perfect time to get your financial affairs in order. For seniors, this means looking beyond simple budgeting and focusing on proactive tax planning. A smart strategy can save your family tens of thousands of dollars, particularly when it comes to outdated legal documents and the management of your retirement accounts.

Is Your Trust Costing Your Family Money?

Many people have revocable trusts that were created five, ten, or even fifteen years ago. At that time, the primary goal was to avoid the federal estate tax, as the exemption was much lower. Today, the financial landscape is completely different. The federal estate tax exemption is now over $13 million per person, meaning very few families will ever have to pay it.

The danger is that these old trusts, designed to solve an old problem, can create a new one: a significant and unnecessary capital gains tax bill for your children. Modern planning has shifted its focus from avoiding estate taxes to minimizing income taxes for beneficiaries. It is crucial to have an experienced attorney review any older documents to ensure your estate plan is updated to reflect current tax laws.

Maximizing Your Retirement Accounts After Age 73

Once you reach age 73, you are required to begin taking Required Minimum Distributions (RMDs) from your traditional retirement accounts (like IRAs and 401(k)s). Most people only withdraw the required minimum, fearing the income tax hit. However, this can be a missed opportunity. A more strategic approach can often be more beneficial.

Consider that it may be better for you to withdraw more now, while you are in a lower retirement tax bracket, than to leave a large balance to your children, who will likely be in a higher tax bracket during their peak earning years. Furthermore, if you are unmarried, your retirement accounts are countable assets when determining eligibility for government benefits. Strategically spending down these accounts can have multiple advantages.

Work with your professional team to see if it makes sense to withdraw more than the RMD to “fill up” your current tax bracket or to offset large medical deductions. This is a key part of planning for long-term care, where high costs can create significant tax deductions.

What About a Roth Conversion?

Converting a traditional IRA to a Roth IRA makes the most sense when your income tax rate is low—typically early in your career or sometimes late in retirement. During your peak earning years, a traditional IRA is usually more advantageous. A Roth conversion is a powerful tool, but its timing is critical to the success of your financial plan.

Call our office at (919) 256-7000 to schedule a consultation.