drive your tax planning . If we take a maximalist outlook instead , the 10-year rule doesn ’ t matter , and it can be ignored . RMDs don ’ t matter , so ignore them .
Let ’ s think instead about “ un-required distributions ,” and start trimming our IRA and other retirement account balances now in order to use today ’ s historically low tax rates . That lets clients take full advantage of the current 12 %, 22 %, and 24 % brackets while they are available .
What ’ s more , recent inflation has raised the income levels for these rates . In 2024 , a 24 % tax rate applies in incomes up to $ 191,950 for single filers ( an increase from $ 182,100 the year before ) after deductions . After that , a 32 % rate takes effect ( the 2024 amount for the 24 % rate is $ 383,900 for married couples filing jointly ).
Action Plans
This is a moment for savvy tax planning , including taking pretax distributions from retirement accounts this year , up to the taxable income amounts mentioned . Assuming the net cash flow is not needed for living expenses , what might be done with the excess funds ?
Roth IRA conversions : Although there are income limits for those who want to make Roth IRA contributions , there are no limits for those making Roth IRA conversions . The latter generally are more effective if non-IRA funds are used to pay the tax . That will mean more money in the Roth account , where qualified distributions are tax-free after five years and after the taxpayer has reached age 59½ .
Moreover , after-tax amounts in a Roth IRA can be withdrawn , untaxed , at any time . Consequently , taxpayers holding ample Roth IRAs have enormous flexibility in tax planning . For example , since tax-free Roth IRA withdrawals are not taxed as income , they can be used to keep future income down for those who want to avoid steep Medicare premiums .
The tax-free treatment of Roth IRA distributions also applies to inherited Roth IRAs , so beneficiaries will not owe tax on distributions even if general tax rates climb in the future . However , those who inherit traditional IRAs can ’ t convert them into Roths later . For estate planning purposes , Roth IRA conversions at modest tax rates can make sense for people at any age , passing the opportunity for untaxed distributions to future generations .
Life insurance : Taxpayers age 59½ or older may want to use the net proceeds from pretax retirement account withdrawals to purchase insurance on their own lives , payable to descendants . The tax benefits of life insurance are exceptional . One is that payouts to beneficiaries usually avoid tax , regardless of the recipient ’ s income .
In addition , permanent life policies ( typically a version of whole life , universal life , or variable life ) often include a cash value account . Any investment income within the cash value will avoid tax ; the cash value can also be tapped by the policy owner , tax-free , via prudent withdrawals and policy loans .
It ’ s true that premiums for permanent life insurance tend to be much higher than they are for term life coverage . That said , if workers and their spouses are not contributing to pretax IRAs and employer plans , as recommended here , their after-tax dollars might go into permanent life policies .
Charitable donations : Those taxpayers who have already reached age 70½ or are older should plan on making their charitable contributions directly from their IRAs via qualified charitable distributions ( QCDs ). These donations count as RMDs but not as taxable income , so they allow IRA owners to reduce their tax-deferred balances without paying tax . That way , appreciated assets in taxable accounts can remain there , without being donated , and eventually pass to heirs with a tax-favored step-up in basis .
Young or old , people with philanthropic intent should cancel all bequests of non-retirement assets to charity ; instead , favored causes can be named as IRA beneficiaries . The money can be removed from the decedent ’ s IRA with no tax for the beneficiary .
Yet another tactic to consider is to name a charitable remainder trust ( CRT ) as IRA beneficiary . Again , money flowing to charitable beneficiaries won ’ t be subject to income tax . What ’ s more , the value of the trust ’ s assets expected to pass to charity is excluded from estate tax , which might be a major attraction since the estate tax exemption is scheduled to decline in the future with the sunset of a 2017 tax law . ( Life insurance may serve to make up for IRA funds lost to loved ones because of the charitable remainder trust bequest .)
Trust Tactics
While we ’ re on the subject of trusts , remember also that it may not be a good idea to name a trust as beneficiary of a traditional IRA . Under current law , the top 37 % tax rate kicks in when 2024 trust taxable income exceeds only $ 15,200 ! The required minimum distributions alone on larger IRAs may easily exceed $ 15,200 and can be taxed at that rate if income is retained in the trust , which may be the case for a discretionary trust that is the IRA beneficiary .
It ' s true that a well-crafted trust could provide control over a large inherited IRA if there are concerns about how a loved one will handle the inheritance . Such control can reduce the risks of a family member or another inheritor overspending , putting too much overconfidence in a con artist , enduring a costly divorce , etc .
Again , the solution here is to convert traditional IRA dollars to the Roth side via a conversion . A Roth IRA makes a better trust beneficiary because distributions from an inherited Roth IRA to the trust will be income-tax-free , even if the funds are retained in the trust . Roth IRA funds left to a trust remove the trust tax problem for inherited funds that the trust retains .
Taking all these steps can result in larger legacies with less ( or no ) tax due . Again , we should think maximum , not minimum , and let long-term tax planning drive our distribution planning to control tax rates today , tomorrow , and in the years to come .
ED SLOTT , CPA , is the founder of www . irahelp . com . This article was excerpted from the September 2024 issue of his IRA Advisor newsletter .
OCTOBER 2024 | FINANCIAL ADVISOR MAGAZINE | 27