At LifePoint Planning, we specialize in helping clients like Jane – high-net-worth individuals with complex financial situations – minimize taxes and maximize the longevity of their wealth. Let’s take a closer look at how we worked with Jane, a 65-year-old retiree, to save over $1 million in taxes through strategic planning.
Meet Jane: A High-Net-Worth Retiree with Big Concerns
Jane’s financial picture includes:
$3.4 million in assets:
$1.8 million in a Traditional IRA (tax-deferred)
$800,000 in a taxable investment account
$800,000 in a Roth IRA (tax-free)
Annual living expenses of $90,000, partially covered by $30,000 per year in Social Security income.
Jane’s biggest concern was the looming tax liability from her large Traditional IRA. Starting at age 75, she would face Required Minimum Distributions (RMDs), which could push her into higher tax brackets, significantly increasing her tax burden in her later years. Our goal was to ensure Jane’s wealth would last throughout her retirement while minimizing taxes along the way.
Here’s how we helped.
Step 1: Optimizing Asset Location
Estimated Tax Savings: $102,000
Not all investments are created equally, especially when it comes to the taxation of the account in which the investment is held. By strategically placing the right investments in the right types of accounts, we reduced Jane’s federal tax liability by about $102,000.
Before:
Jane held taxable bonds, taxable money market funds, dividend-paying stocks, and REITs in her taxable account.
Action:
We recommended and implemented the following:
Tax-efficient investments, like index ETFs, buffered ETFs, tax-efficient cash equivalents, and municipal bonds, were placed in her taxable account.
Growth-focused investments were moved to her Roth IRA to take advantage of tax-free growth.
Income-generating investments stayed in her Traditional IRA, where taxes are deferred.
This alignment allowed Jane’s portfolio to grow more efficiently while reducing unnecessary tax drag.
Result:
Jane’s taxable investment income dropped, reducing her annual tax liability significantly. This simple change is estimated to save Jane over $100,000 in taxes throughout her lifetime.
Step 2: Implementing Roth Conversions
Estimated Tax Savings: $472,000
To tackle Jane’s large Traditional IRA and the future tax burden it represented, we recommended a series of Roth conversions. By gradually converting portions of her Traditional IRA to her Roth IRA, up to the 22% federal tax bracket, Jane locked in today’s lower tax rates. She avoided higher taxes later when RMDs would kick in at her age 75.
Before:
No strategic plan for Roth conversions.
Action:
We developed a robust plan factoring in multiple variables (key factors to consider before making Roth conversions) and decided that it made sense to recommend Roth conversions up to the 22% federal tax bracket.
Result:
By age 75, Jane converted more than $1,000,000 to her Roth IRA.
She reduced her future tax burden due to lowering her exected RMDs on her Traditional IRA.
The tax-free growth in her Roth IRA also reduced her and her heir's future tax liability.
Here’s why this strategy worked:
Roth IRA withdrawals are tax-free, meaning future growth in these accounts would not add to her taxable income.
By spreading the conversions over multiple years, we kept her tax liability manageable and avoided bumping her into a higher tax bracket prematurely.
Step 3: Maximizing Charitable Giving
Estimated Tax Savings: $33,000
Jane is passionate about giving back, so we introduced tax-smart charitable strategies to amplify her generosity while reducing her tax bill:
Bunching donations: Instead of donating $20,000 per year in cash to her favorite causes, we recommended that Jane donate $60,000 in appreciated stock to a donor-advised fund. This approach allowed her to maximize the tax benefit of her charitable giving while providing ultimate flexibility to give when and to whom she wants.
Qualified Charitable Distributions (QCDs): Once Jane turns 70.5, she can make charitable contributions directly from her Traditional IRA, reducing her taxable income and satisfying part of her RMD requirement.
Together, these strategies are expected to save Jane about $33,000 in taxes while supporting the causes she cares about.
Before:
Jane was making cash donations, which wasn't as tax-efficient as it could've been.
Action:
We recommended and implemented a bunching strategy to optimize Jane's tax planning without sacrificing flexibility.
Result:
Tax savings for Jane both immediately and for the rest of her life.
Step 4: Developing a Tax-Smart Withdrawal Strategy
Estimated Tax Savings: $436,000
Timing and the source of Jane’s retirement withdrawals played a critical role in minimizing her taxes. We recommended the following approach:
Use her taxable investment account first for retirement income. This allowed her Traditional IRA and Roth IRA to continue growing without tax while keeping her taxable income low.
Pair this strategy with Roth conversions to further reduce her long-term tax burden.
By sequencing her withdrawals in this way, Jane is projected to save an additional $436,000 in taxes over her retirement.
Step 5: Creating a Legacy Plan
Transforming Jane’s Estate for the Next Generation
Before working with us, Jane’s estate faced significant income tax consequences for her beneficiaries. With a large Traditional IRA, only about 45% of her estate’s value was expected to pass to her beneficiaries free of income tax upon her death.
Now, thanks to the strategies we implemented – including Roth conversions and tax-smart charitable giving – we estimate that 99% of Jane’s estate will pass to her beneficiaries free of income tax. This ensures that the wealth Jane worked so hard to build will benefit her loved ones, not the IRS.
Assumptions Behind Our Projections
The tax savings and projections outlined above were based on the following key assumptions:
Rate of Return: Jane’s portfolio is expected to achieve an annualized return of 7.1%, with a standard deviation of 11.2%, reflecting a moderate level of market volatility.
Portfolio Allocation: Her portfolio is allocated 60% to equities and 40% to fixed income or cash, consistent with a balanced investment strategy for retirees.
Roth Conversions: Roth conversions are executed up to the 22% federal income tax bracket under current tax law, increasing to 25% when the Tax Cuts and Jobs Act (TCJA) provisions expire.
Inflation Rates: General inflation is assumed to be 3% per year, while healthcare costs are expected to rise at a higher rate of 5% per year, reflecting the increasing expense of medical care in retirement.
Taxable Account Cost Basis: The cost basis of Jane’s taxable account is 50% of the account’s current value, meaning half of the account value is subject to capital gains taxes upon liquidation.
Dividends in the Taxable Account: Dividends in Jane’s taxable account are assumed to be 85% qualified and taxed at preferential rates, while the remaining 15% are ordinary dividends subject to regular income tax.
Capital Gains Composition: Sales of taxable investments are assumed to generate 90% long-term capital gains (taxed at lower rates) and 10% short-term capital gains (taxed at ordinary income rates).
Portfolio Turnover: The annual portfolio turnover is 5%, reflecting a relatively low level of trading activity, which helps minimize taxable events and associated capital gains taxes.
These assumptions are designed to provide a realistic framework for evaluating Jane’s financial and tax outcomes over her retirement. While individual results may vary based on market performance, tax law changes, or personal circumstances, this framework ensures our recommendations are grounded in well-researched and prudent financial principles.
The Bottom Line: Over $1 Million in Tax Savings
Through a combination of asset location, Roth conversions, charitable giving, strategic withdrawal planning, and legacy planning, we helped position Jane to save more than $1 million in taxes and protect her estate for future generations. This is a testament to the power of personalized financial planning and the value of working with a team of experts who understand the unique challenges faced by high-net-worth retirees.
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