I see all sorts of articles online regarding the benefits of doing $100,000 Roth conversions over a 10-year period, which makes me think that a lot of people aren’t even evaluating income tax brackets. But that’s the best place to start when evaluating whether a Roth conversion makes sense.

Here are three thresholds you need to consider before deciding to do a Roth conversion:

1. Your income tax rate.

This is us looking left. The reality of a Roth conversion is that it’s just a bet that your current tax rate is lower than your future tax rate. If so, you’d rather pay the taxes today. If you’re in the period between retirement and when you start RMDs (required minimum distributions), this can be a pretty safe bet.

I met with a client the other day who is three years out from RMDs. Once both spouses start receiving RMDs, that will push them from the 24% marginal bracket to 32%. So, in doing the conversion calculation, we want to see how much we can convert while staying in the 24% bracket.

2. Your capital gains tax rate.

We are looking right. People talk about capital gains tax rates as though they are 15% for everyone. That is not the case. Evaluating capital gains rates is most important at low income levels and at high income levels.

When your income is very low, a Roth conversion can cause you to go from paying 0% in capital gains to paying 15% on everything. This is an expensive trigger.

Once taxable income crosses above $518,900 (S) or $583,750 (MFJ) for 2024, you jump from 15% to 20%. Less talked about is the 3.8% net investment income tax, which, as it sounds, is a tax on investment income over $200,000 for individuals and $250,000 for a married couple filing jointly.

3. Your Medicare premiums.

Finally, we are going to check the bike lane to ensure we don’t get smacked by an e-bike. Premiums for Medicare Parts B and D are income-adjusted. However, unlike the above income tests, Medicare premiums are determined by gross, not taxable, income. The Part B premiums can increase by as much as $419 per month, per person, based on income. In my experience, this is the one that upsets people the most.

To be clear, you’re not always trying to stay under every threshold. In many situations, it makes sense to pay more in Medicare premiums to avoid a much larger income tax bill down the road.

Evaluating Roth conversions in your situation requires projecting out your future tax rates; i.e., should you even be crossing the road at all? To get a sense of what your rates may look like, you can build out a free plan here.

Related Content

• Roth Conversions: Convert Everything at Once or as You Go?
• Are You Ready to ‘Rothify’ Your Retirement?
• Is a Roth Conversion for You? Seven Factors to Consider
• Roth IRA Conversions: Benefits and Considerations Beyond Taxes
• How a Backdoor Roth IRA Works (and Its Drawbacks)

But people also recognize this: No one wants to give Uncle Sam more money than necessary, especially since all of us have our own uses for that money.

That’s where good tax planning comes into play. With the right strategies, you can reduce your income tax bill, put fewer dollars in Uncle Sam’s pocket and keep more in yours.

That can be especially beneficial for retirees, who need to make sure their money lasts the rest of their lives.

Let’s look at three ways you can give Uncle Sam less so you can keep more.

1. Carefully consider which assets to leave to beneficiaries.

It’s nice to be able to bequeath something to your children, grandchildren or others after you are gone. But as you make plans to do so, keep in mind the income tax ramifications, both for you and for your heirs. With the right moves, you both can avoid taxes.

For example, if you have assets such as stocks or real estate that have appreciated in value since you purchased them, you should consider the advantages of a “step-up in basis.” If you were to sell those assets now, you would pay capital gains taxes. on whatever gains you have made. Leave these assets to your heirs, though, and the situation changes because the step-up in basis rule comes into play. Under that rule, there is a restart on the date from which the gains are measured. Instead of being calculated from when you purchased the asset, the gain is determined from the time your heirs inherited the asset.

Let’s say that many years ago, you bought several shares of a stock for $10,000, and today those shares are worth $50,000. If you have the option, this might be a good candidate to leave to your heirs rather than sell right now. If you sold the stock, you would owe capital gains tax on the $40,000 gain. But if you leave the stock to your beneficiaries, their starting point for capital gains is $50,000 (or whatever the value is at the time of your death) because of the step-up in basis. If they sell quickly, they likely would owe little or no capital gains taxes.

2. Have a strategy to pay taxes efficiently.

But, of course, leaving assets to beneficiaries means someone else has to pay taxes after you are gone.

You are paying taxes in the here and now. As you do so, you need a strategy to make sure you are paying them in the most efficient manner and that you are taking advantage of anything in the tax code that allows you to pay less.

That begins with capitalizing on the income-tax deductions available to you. About 90% of taxpayers use the standard deduction, which has risen over the years, especially after the Tax Cuts and Jobs Act of 2017 was passed. The deduction is even higher for those who are blind or who are 65 and older, though you have to be sure to check a box on your 1040 form and add on the extra amount.

In the past, more people Itemized their deductions, and that is still an option. It’s just difficult for the average person to come up with enough deductions to bring the itemized total higher than the standard deduction. But if you can itemize and claim an even greater deduction than the standard, you want to go that route.

Among the tax deductions that could help you get to the appropriate total are mortgage interest, medical expenses and charitable contributions. Make sure you deduct only what is allowed, though. For example, medical expenses are deductible only when they exceed 7.5% of your adjusted gross income.

Another way to be efficient with your tax payments is to keep an eye on the income tax brackets and the possibility of dropping into a lower bracket. For example, if a married couple filing jointly can reduce their taxable income to $89,450 or lower, they move out of the 22% tax bracket and into the 12% bracket. (Extra deductions can help you move from one of the higher tax brackets as well, but the gap between the 22% bracket and the 12% is the largest.) It’s worth noting that even when you are in the higher bracket, all of your income is not taxed at the higher rate. Only the portion of your income that exceeds a certain threshold is taxed at that higher rate.

3. Make sure investments are in the proper accounts.

One other way to pay taxes efficiently is to make sure your investments are in the appropriate accounts that will be most likely to produce the desired results. If you aren’t careful, you can incur unnecessary taxes.

Essentially, the accounts you might have money invested in can be broken down into two types: accounts that are taxable and accounts that come with some sort of tax advantage.

Taxable accounts include brokerage accounts, where you might hold stocks. The upside with these is there is no age restriction or other restriction on getting access to your money. You do pay taxes, but if you have held the asset for more than a year, it is considered a long-term capital gain and is taxed at a lower rate than regular income.

Tax-advantaged accounts are those with investments that are tax-deferred, such as a traditional IRA or 401(k), or that are tax-exempt, such as a Roth IRA, where you pay the taxes now but not when you begin withdrawing money. Although these accounts give you some tax advantages, one tradeoff is they have rules on when you can withdraw money and penalties if you break those rules.

So where to put your money?

That comes down to the type of investment. As much as possible, you want investments that are subject to little or no taxes in your taxable accounts. Investments subject to a higher tax rate should go into the tax-advantaged account.

A good financial professional can help you determine the best investment accounts for your individual situation. That person can also help you find other ways to make sure you are paying taxes in the most efficient manner possible.

By taking the right measures, you will still pay what you legally owe — but not more than required.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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• Is Your IRA an IOU to the IRS? Three Retirement Tax Strategies

When you are giving to charity, that must be the primary intent. The tax savings that go along with it should be optimized by choosing the strategy that makes the most sense for you. This article is for those who are charitably inclined and also have a desire for retirement income. Lastly, if executed properly, these methods will save some tax bucks. 

Charitable gift annuity

If you’re a Baby Boomer, it’s likely your alma mater has made you quite aware of its charitable gift annuity (CGA). Many college websites will even run an illustration to show you the tax benefits and income you’ll receive on an annual basis.

Here’s how it works:

• You make an irrevocable gift of cash or an appreciated asset to a charity. Universities are common beneficiaries, but it can be any qualified charity that has a charitable gift annuity
• You receive an immediate charitable deduction for a portion of the gift
• You receive a fixed income stream for a set period or for the rest of your life
• At the end of the period or your life, the remainder goes to or stays with the charity

Here’s where I would use this strategy:

• An appreciated asset is always a good starting point. If you bought Apple stock before you bought an iPhone or bought Nvidia stock before 2023, you may be a good candidate
• While these figures are subjective, I generally think this strategy makes sense for a single charity where the gift is between $50,000 and $250,000. If you get above $250,000, a charitable remainder trust may make more sense
• You feel strongly about the charity. Remember, this is an irrevocable gift. You cannot get the money back, and you cannot change the remainder beneficiary

Charitable remainder trust

This is a strategy we employ for clients who are generous but want to reserve the right to change who they are generous toward. As with your living trust, you will have to employ a trust and estate attorney to draft the trust. You will also have to use the services of a tax professional to file a trust tax return each year. Sound complicated? 

Here's how it works:

• You make an irrevocable gift into a charitable remainder trust (CRT)
• You receive an immediate charitable deduction for a portion of the gift
• You receive a fixed income stream (through a CRAT) or a percentage of the balance in the trust (through a CRUT) for a set term or for the rest of your life
• At your death, the remainder goes to the beneficiaries listed in the trust

Because the mechanics sound, and are, very similar, it’s important to highlight some of the reasons I would opt for the CRT route over the CGA route:

• Desire for flexibility. The gift to the trust is irrevocable, but you can change the beneficiaries of the trust
• The complexity necessitates larger gifts to make sense. You must consider the cost to draw up the trust, file an annual tax return and manage the trust assets
• There can be multiple beneficiaries
• It gives the trustee control of the investments
• A CRT allows you to avoid a potentially large capital gain

In every situation that we have recommended one of these strategies, there have been two stories. First, the story of the charity and the impact that charity had on the client or is having on the world. Second, the story of the appreciated investment that allowed the donor to make such a large gift.

This article should not serve as a recommendation to do one or both. It should simply allow you to zoom in a little closer on what may make sense for you. But before you do, make sure you have the capacity to give. In other words, can you give a large gift and still maintain your lifestyle? Your financial plan answers that question. You can build one using the free version of our planning software here. 

Related content

• Three Ways to Give to Your Kids Tax-Free While You’re Still Alive
• Four Ways to Give Money Tax-Free to Your Kids When You Die
• Developing a Charitable Giving Strategy: Where to Begin
• How to Assess the Impact of Your Charitable Giving
• What to Do if Your Passion for Charitable Giving Has Flagged

An irrevocable trust agreement must be designed, drafted and implemented to deal with two primary categories of taxes: 1) transfer taxes, such as gift and estate taxes, as well as the less common generation skipping transfer tax, and 2) income taxes, such as earned income taxes, income taxes on investment or capital gains taxes, which are income taxes on property appreciation after the property is sold or exchanged.

Either the irrevocable trust or an individual will pay taxes on all trust income. Trust income includes rents on real estate, profits produced by trust investments, the appreciation income from property sold or distributions of assets from the trust. Under the comprehensive tax rules, all trust income must be reported on either the trust income tax return (at trust tax rates) or on the tax return of the trust maker or beneficiary (at individual tax rates).

Putting this into different words, irrevocable trusts can be set up so that the trust maker no longer pays income taxes, and the taxes are instead paid by the trust. Note that the income tax rules for non-U.S. residents and non-U.S. citizens will vary quite a bit from the income tax rules we are discussing here.

Trust tax rates are much higher than individual tax rates

Why wouldn’t everyone want to set up an irrevocable trust so that they don’t need to individually pay income taxes any longer? The reason why most taxpayers are better off to pay taxes individually rather than having a trust pay income taxes is because trust tax rates are often much higher than individual tax rates.

The higher trust tax rates are due to the fact that an irrevocable trust has only hundreds of dollars in standard deduction, and an irrevocable trust pays the highest federal tax rate after just a few thousand dollars of income. Unless the irrevocable trust maker is already paying taxes at the highest marginal individual tax rate, it is almost always less expensive for the trust maker to keep on paying the trust income taxes.

Example. A trust maker with rental properties reads that they can stop paying taxes themselves by forming a trust. The trust maker asks an attorney to set up a trust with rental property LLCs so that the trust will pay taxes, thinking that the trust and LLC structure will save a lot of taxes. When the attorney calculates how much the trust would pay in taxes compared to the trust maker paying individually, the trust would pay more than two times more taxes! The attorney advises the trust maker that instead of having the trust pay taxes, the trust maker should set up a trust with “grantor” provisions so that the trust maker will continue paying taxes at the trust maker’s lower tax rates.

The fact is that most people would save on taxes by continuing to pay income taxes on the irrevocable trust income themselves, rather than having the irrevocable trust pay the income taxes at trust tax rates. The feature in an irrevocable trust that permits the trust maker or another person to pay trust income taxes is known as “grantor trust status.”

As a general rule, if an irrevocable trust is treated as a grantor trust, this means that an individual (typically the trust maker) will be treated as the owner of the trust income or principal, and the individual needs to include on their personal tax filings all items of trust income, deductions and credits as though the individual had received them personally — even if the trust didn’t distribute the income to them personally and the income stays in trust. Where several different people are treated as owners of different parts of the trust income or principal (multiple grantors), the taxes will be allocated between the different people.

It is important to note that we are primarily discussing federal income tax here, though many (but not all) state income taxes and state capital gains taxes follow the federal income tax laws.

To be certain we are clear, I’ll again point out that trusts deal with both income taxes (including earned income, investment income, losses, deductions and capital gains income taxes), and trusts also deal with transfer taxes (estate and gift transfer taxes, as well as generation skipping transfer taxes). On the transfer tax front, a trust may be designed to exclude assets from the trust maker’s gross estate (referred to as a completed gift trust), though the very same trust can be designed so that the income of the trust is taxed to the trust maker (grantor trust status).

Grantor trust rules are part of the tax code

The grantor trust rules are part of the Internal Revenue Code (IRC), which are found in Title 26 of the United States Code, the U.S. federal laws passed by Congress. More particularly, the grantor trust rules are found in Sections 671 to 679 of the IRC. The grantor trust rules generally provide that if the trust maker (or another person) has certain powers over the trust that are found in IRC Sections 673-679, the trust income will flow through to be taxed at the trust maker’s personal tax rates — and personal tax rates are almost always lower than trust tax rates.

A few examples of the powers that a trust maker can keep over the trust, so that the trust qualifies for grantor status and trust income is taxed to the trust maker, include generally: powers to invest (IRC 673); powers to reacquire trust assets, i.e. buy back trust property (IRC 673); powers to replace the trustee (IRC 675); powers to substitute property in the trust (IRC 675); power to use trust assets (IRC 677); power to veto distributions (IRC 678).

This sample list of grantor trust rules is very incomplete, and over time, billions of people with billions of needs have created millions of trusts with endless permutations of trust powers. This has caused the IRS, lawyers and tax court judges to spend countless hours determining whether bespoke and customized trust powers will cause trust income to be taxed to a grantor (usually the trust maker) or whether it should be taxed to the trust.

Complicating the matter of grantor trusts is the fact that some of the same trust income tax grantor powers will also cause a trust to be included in the gross estate and/or taxable estate of the trust maker. Again, estate tax is a different tax regime than trust income tax. For example, the power to revoke or amend the trust, a grantor trust power under IRC 676, will also cause a trust to be included in the grantor’s gross estate under a few different sections of the IRC (IRC 2036 and IRC 2038). In other words, a trust maker who retains the power to revoke or amend a trust (a revocable trust) ensures not only that the trust income is taxed to the trust maker, but also that the trust assets will be included in the trust maker’s gross estate.

Example. A trust maker forms a trust for a beneficiary, and the trust maker retains a “reversionary interest” under IRC 673 where the trust maker (or the trust maker’s estate) has the right to get back all of the trust property after the beneficiary dies. This grantor trust power will both cause the trust maker to be treated as the grantor for income tax purposes, and the trust property will also be included in the trust maker’s gross estate. The trust maker is happy with both tax results because the trust maker’s income tax rates are lower than trust income tax rates, and the trust property will get a step-up in basis by inclusion in the trust maker’s gross estate, although the trust maker will not owe any estate tax because the trust maker has adequate exemption from estate tax so that the trust maker’s gross estate is not taxable.

People who don’t have millions in wealth won’t pay estate taxes on their gross estates anyway, so the inclusion in the gross estate caused by grantor trust powers to amend under IRC 676 isn’t a problem at all. In fact, revocable trusts are usually the most tax-efficient type of trust for most people, who pay lower taxes individually compared to the higher trust tax rates, and a revocable trust also ensures that the trust property will qualify for a step-up in basis when the trust maker dies, under the capital gains rules of IRC Section 1014.

Because revocable trusts are both income tax and capital gains tax efficient, and revocable trusts are excellent for estate planning, revocable trusts are the most common type of trust. However, revocable trusts do nothing to protect assets, and revocable trusts don’t remove assets outside of the gross estate for people who have some wealth and need to avoid the estate tax.

Example. A trust maker engages an attorney to set up an irrevocable trust with the objectives of protecting assets and to avoid estate taxes on their estate. The trust maker has low tax basis in rental properties because the rentals were purchased 30 years ago when properties were considerably less expensive. The trust maker’s gross estate ( a concept similar to total net worth) is $5 million. The attorney advises the trust maker to form an irrevocable asset protection trust to hold the LLCs. The attorney drafts the trust to include provisions so that the trust maker retains grantor powers to pay taxes on the rentals by retaining rights to borrow against the rentals. The attorney also drafts the trust with provisions so that the trust maker retains rights to use trust income. When the attorney and trust maker meet, the attorney explains that the trust powers drafted in the trust not only cause the trust maker to pay taxes on the trust income — at income tax rates much lower than the trust would pay — but the powers also cause the trust-owned rentals to be included in the gross estate of trust maker. The trust maker is surprised that the attorney didn’t draft the trust to exclude the rentals from their gross estate, thinking that because the assets are included in the gross estate, the trust maker’s beneficiaries will need to pay estate taxes. The attorney explains that even though the rental properties are included in the trust maker’s gross estate, the trust maker has significant estate tax exemption, so the beneficiaries will not owe any estate tax. More important, because the low-basis rental properties are included in the gross estate, the inclusion in the estate will qualify the low-basis rental properties for a step-up in basis to the value at the time of death. This step-up in basis will save the beneficiaries significant capital gains taxes when the trust maker dies.

Why use a non-grantor trust vs a grantor trust?

Non-grantor trusts, defined as “complex” by the IRS, are trusts that owe income tax at the trust level and do not push out income and deductions to individuals. You may be wondering — if a non-grantor trust pretty much always pays the highest marginal tax rates, why would I want anything other than a grantor trust? Here is a scenario that illustrates when it could make sense to terminate the grantor trust powers and switch a trust to non-grantor.

Example. A trust maker has high income and is currently paying the highest marginal tax rate. The trust maker previously formed a completed gift trust that is outside of the trust maker’s gross estate, and the completed gift has grantor trust income tax provisions so that the trust income flows through to the trust maker. However, the completed gift grantor trust income is being taxed to the trust maker personally at their highest marginal tax rate. Put differently, the trust maker does not save income taxes by personally paying the trust income taxes. Further, a trust maker does not need or want to spend down the trust maker’s personal assets that are included in the trust maker’s gross estate — i.e. the trust maker’s personal assets are diminishing and/or the trust maker cannot afford to keep paying taxes on behalf of the trust. Because there is not an advantage (or even what could be a disadvantage) to having the trust maker continue to pay the trust income taxes since they are taxed at the highest rate anyway, and also because there is not an advantage for the trust maker to pay trust income taxes to spend down their personal assets (gross estate), the trust maker decides to terminate the grantor trust powers.

A trust maker will need to decide on a trust income tax provision (either grantor or non-grantor) that is best suited to minimize their taxes, depending on how much the trust maker earns. Keep in mind that a trust can include a renunciation of grantor trust provisions where the trust maker pays the taxes individually and later have the trust pay the taxes rather than the trust maker (or beneficiary) if that will lower the trust’s and individual’s total income tax burden.

However, a provision that terminates the grantor trust status must not be “toggled” on and off to avoid income taxes, or the IRS will challenge the trust. Additionally, a grantor trust can include a provision to reimburse the trust maker for the taxes they pay, though such a provision can pose gift tax risks or even estate tax inclusion risks if the tax reimbursement power is mandatory.

Another advantage of grantor trusts

Another powerful advantage of grantor trusts for estate tax planning is the ability of grantor trusts to reduce any assets remaining in the trust maker’s estate by having the trust maker pay the income taxes on trust income. If the property transferred into a trust is removed from the trust maker’s estate because the trust maker gave up possession, enjoyment and control over trust assets (a completed gift), rather than having the trust pay income taxes with trust property, the trust maker can pay the taxes for the trust. Using the grantor trust provisions to have the trust maker pay taxes on the trust property is the functional equivalent of the trust maker transferring more property into the trust.

Grantor trusts have been on the “green book” tax agendas of the IRS and several U.S. presidents who are keen to take away the powerful advantages that grantor trust status provides. Keep in mind that revocable trusts are the most common type of trusts, and revocable trusts are always grantor status. No one is trying to do away with revocable trusts, and the grantor trust status that is automatically afforded to revocable trusts won’t be challenged by Congress. Rather, the IRS and some U.S. presidents have been trying to do away with grantor trust advantages when the grantor trust provisions are used by trust makers to increase the value of large, complex trusts by having the trust maker continue to pay the income taxes on the trust using the trust maker’s personal assets that are still subject to estate taxes.

As much as the news focuses on using grantor trusts to reduce the potentially taxable gross estate, non-grantor trusts have become a high priority of states with high income tax rates, such as California and New York. In these states, high-income earners have been setting up trusts in other jurisdictions with no trust tax (places like Delaware, Nevada, South Dakota or Wyoming) and making the trust “intentionally non-grantor” so that the trust pays federal income taxes but avoids the high California and New York taxes.

The trust makers also make the trust incomplete for estate tax purposes so that the trust assets are purposefully included in the trust maker’s gross estate to get a step-up in basis for capital gains tax purposes. Both California and New York have passed laws that work contrary to the federal law so that the high-income-tax states can still tax the income of the non-grantor trusts.

Grantor trust income tax provisions are powerful because they permit a trust maker to pay the trust taxes themselves — and individuals almost always pay taxes at a lower rate than a trust. Additionally, when the income tax planning afforded by grantor trusts is paired with estate tax planning, grantor trusts are a powerful mechanism to effectively reduce the trust maker’s gross estate remaining outside of the estate tax-exempt trust.

However, caution must be exercised with the grantor trust rules because they interplay very closely with the estate tax and capital gains tax rules.

My next article will focus on how grantor trust provisions can have a significant effect on whether trust assets will be included in the gross estate of a decedent for computation of estate transfer taxes, and whether it is desirable to have trust assets included in the gross estate.

Other Articles in This Series

• Part one: To Avoid Probate, Use Trusts for Estate Planning
• Part two: How Quitclaim Deeds Can Cause Estate Planning Catastrophes
• Part three: Revocable Trusts: The Most Common Trusts in Estate Planning
• Part four: With Irrevocable Trusts, It’s All About Who Has Control
• Part five: Ins and Outs of Domestic Asset Protection Trusts (DAPTs)
• Part six: Irrevocable Trusts: Less Control Equals More Asset Protection

Related Content

• Six Benefits of Setting Up a Trust for Your Assets
• Estate Planning: Who Needs a Trust and Who Doesn’t?
• Eight Types of Trusts for Owners of High-Net-Worth Estates
• Four Reasons Retirees Need a (Revocable) Trust
• Four Reasons You Don’t Need a (Revocable) Trust

What to give

Donating cash is a simple, popular approach that allows charities to put the donation to use immediately. However, donating other types of assets may allow you to maximize the income tax advantages of charitable giving while still fulfilling your mission.

For example, donating appreciated securities is a great way to leverage your charitable giving from an income tax standpoint. Rather than selling those securities, paying capital gains tax and then donating the leftover cash to charity, you can make an in-kind donation of those appreciated securities directly to the charity. You will receive an income tax deduction for the donation, and the charity can sell the securities tax-free.

Another option is gifting a complex asset, such as an interest in a privately held business or real estate. This technique is often utilized when the owner is considering a sale of the asset. Similar to the approach of gifting appreciated securities, if you donate an interest in a complex asset that is later sold, you will reap the double income tax benefit of the charitable deduction and avoid capital gains tax on the portion that was gifted to charity upon a later sale.

Donors considering this technique should work closely with their advisers to identify a proper charitable recipient, as not all charities are equipped to hold complex assets. Timing of the gift is also an important consideration — if the gift occurs too close to the sale of the asset, the assignment of income doctrine may apply.

Finally, a qualified charitable distribution (QCD) from your individual retirement account (IRA) is an effective way to benefit charity while lowering your tax bill. If your taxable retirement account is subject to a required minimum distribution (RMD), you may direct up to $105,000 (in 2024) from that account directly to a public charity (excluding donor-advised funds). The amount distributed to charity counts against your RMD and will not be included in your taxable income for that year.

How to give

Beyond knowing what to give, it is equally important to know how to give. From direct contributions to split interest trusts, there are plenty of ways to give that best suit you and your family's plans:

Direct contributions. Direct contributions are one of the easiest ways to give to the charity of your choice. You can write a check or work with your financial adviser to wire appreciated securities directly to the organization. Gifts of complex assets require more planning, so you should consult with your financial, tax and legal advisers well in advance of making the gift.

Private foundation or donor-advised fund (DAF). These entities are a great way to create a philanthropic legacy and get your children or other family members involved in your charitable mission. While private foundations and DAFs both make grants to charities, there are key differences between the two, so donors should work with their advisers to determine which vehicle makes the most sense given their goals.

Split interest trust. A split interest trust, such as a charitable remainder trust or charitable lead trust, is a good option for those looking to benefit a charity while also shifting assets to family members or even retaining an income stream for themselves. These are irrevocable trusts that are split into an income interest, which is for a set term, and a remainder interest, which is the balance of assets at the end of the term.

Who should you give to?

After determining how and what you'd like to give, it's time to consider where your donations will go. With more than 1.54 million charitable organizations in the U.S., it's essential to vet these organizations and ensure their missions align with your values.

Unfortunately, donors can often be exposed to scams that seek to benefit from their good intentions and generosity. Before donating, it is important to ensure that your contribution is going to the intended recipient. There are several ways to vet charitable organizations and make an informed decision.

Make sure the charity is in good standing. Use the IRS website's function to research an organization’s standing. Search for a charity by name or employer identification number to find out when an organization was first recognized as tax-exempt, if its tax-exempt status has been revoked and whether contributions are tax-deductible.

Conduct a financial health check. Charitable organizations are required to make their three most recent tax returns available to the public. Review a charity’s tax returns (Form 990-PF for private foundations and Form 990 for other exempt organizations) and supporting documents for its annual income and expenditures, including grants made and salaries paid. Federal returns can be found on the IRS website, and returns for the state(s) in which the charity is registered can be found on the state’s attorney general website. You can also go beyond the numbers and review the organization’s most recent annual report for more detailed information on what a charity has done in the past year to further its mission. This can often be found on the charity’s website.

Get involved. To really get to know an organization before you donate, consider reaching out to see if volunteer opportunities are available. In addition to a financial contribution, you would donate another valuable resource — your time — while gaining an insider perspective on how the charity allocates resources and serves its community. If you are considering volunteering, it can be helpful to contact the charity you are interested in and ask if you can interview current volunteers, donors or board members.

Creating a philanthropic legacy

As you develop a philanthropic strategy, you have an opportunity to involve younger generations. Ask for their help in the vetting process and talk about what causes are important to them. If you have a family foundation or DAF, ask for their input on grants and how and why they chose recipients. Older adolescents may eventually serve as a trustee of or be employed by the family foundation.

When you involve the next generation, this kind of planning evolves past charitable giving and creates an impactful, lasting legacy for you and your family.

The views and opinions expressed are for informational purposes only and are current as of the date of the publication and may be subject to change. Neither, Brown Brothers Harriman, its affiliates, nor its financial professionals, render tax or legal advice. Please consult with an attorney, accountant, and/or tax advisor for advice concerning your particular circumstances.

Related Content

• How to Assess the Impact of Your Charitable Giving
• What to Do if Your Passion for Charitable Giving Has Flagged
• Considering Donating to Charity? Here’s a Road Map to Steer Your Choices
• How to Maximize Your Impact With Strategic Philanthropy Tools
• How Estate Planning Can Thwart the ‘Third-Generation Curse’

It made me think what the “easy swing and follow-through” of retirement planning is. In other words, what are the simple fundamentals that will lead to good results?

Let’s start with that easy swing.

1. The alignment of your stance is the equivalent of your financial plan.

In its purest sense, your financial plan ensures that your assets are aiming in the direction of your values and goals. If you want to help ensure your plan is on the right track, you can build one for free here.

2. Your club equals your asset allocation.

It’s just as tempting to buy Nvidia (NVDA) right now as it is to try to drive that short par 4. It’s probably better to swing easy and get there a bit more slowly rather than lose your ball in the water because you were greedy. Putting it more concisely, don’t swing for the fences if you’re retired or about to be.

3. The actual swing equals what you can control.

In golf, you can’t control the conditions. In retirement planning, you can’t control the market or the economy. Here are the things you can control and should focus on:

Cost. According to S&P Global, over 87% of all active large cap mutual fund managers did worse than the S&P 500 over the last 15 years, ending December 31, 2023. Why? Cost is one of the biggest drivers of underperformance. It creates a hurdle that fund managers must, but often don’t, overcome. It’s the biggest reason we don’t like to have mutual funds in our client portfolios. Of course, there is a time, a place and even a few winners, but we take the sure thing of low-cost.

Consolidation. All of your accounts tell a life story. I had this 401(k) from that employer. I signed up for this bank account to get a $500 bonus. In retirement, simple beats optimal. There are so many flexible, low-cost investment platforms that there is no good reason to have a lot of different investment accounts. They become too hard to manage and withdraw from, and they create a mess for your beneficiaries.

Asset location. This is the lesser-known cousin of “asset allocation.” Try to hold the right type of investments in the right places. For example, income from REITs is considered ordinary income, so REITs should be held in a retirement account. Growth stocks tend not to pay dividends, so they should be held in taxable accounts.

The follow-through includes the things that, even if you do easy-swing issues one through three above correctly, can prevent your ball from flying according to the plan. Here are the biggest misses I see on the follow-through:

1. You’ve done no tax planning.

We’ve all heard the saying, “It’s not what you make. It’s what you keep.” This is that. I’ve seen people so focused on getting their investments perfect that they miss big tax opportunities and end up paying six or seven figures more than they have to in retirement, in taxes.

2. You’re not sufficiently insured.

Insurance planning changes in retirement as you shift from insuring your income and liabilities to insuring against major health events. Many people have no choice but to accept the fact that going into nursing care for a prolonged period will wipe them out. Most of our clients want some sort of protection against this risk, even if it’s just the equity in their home.

3. You didn’t follow through on the estate planning.

Drafting a will and/or trust is not enough. There is typically a set of instructions on assets that need to be retitled or beneficiaries that need to be designated. Until this happens, you just have a big binder full of paper.

It turns out there’s more than I thought to an easy swing and a follow-through. I’m feeling better about my golf game already.

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For example, if you and your spouse have $1 million in retirement savings tucked away in traditional IRAs, 401(k)s or 403(b)s, your nest egg is likely to be worth $760,000 at the 24% marginal federal tax bracket.

Combine the bite that federal taxes will take out of your retirement savings with the potential additional hit of state and local income taxes and inflation, and you may already be seeing your retirement goals getting harder to reach.

Why taxes hurt in retirement

Taxes have the potential to hit you hard in retirement due to the way the retirement savings and tax systems are set up. If you are a Baby Boomer or Gen Xer, you’ve spent most of your life saving within traditional retirement savings vehicles because that’s all that was available for many decades. And even though Roth IRAs and Roth 401(k)s have been around for a while, they aren’t nearly as widely used as traditional IRAs, 401(k)s and 403(b)s.

The tax deductions that traditional retirement savings vehicles offer upon contribution are popular, which is one reason why contributions into Roth accounts lag behind traditional accounts. The downside of those deductions means that taxes must be paid when you withdraw your appreciated savings in retirement.

And those withdrawals are not optional. When you turn 73 — or 75, if you were born in 1960 or later — you must take what is known as required minimum distributions (RMDs) each year based on your life expectancy as calculated by the IRS. It doesn’t matter if you don’t need the money for your living expenses — you must take RMDs or face IRS penalties.

You may need to withdraw more than the RMDs required to fund your standard of living in retirement, which means — you guessed it — more taxes.

These taxes can have a cascading effect in retirement. Not only do they reduce the amount of assets you have to spend on maintaining your lifestyle and all the potential health care expenses that retirement brings, but they can also increase other costs, such as the tax on your Social Security benefits and the amount you pay in Medicare premiums.

If you are married and have a combined income of more than $32,000 a year in retirement, 85% of your Social Security benefits will be taxed; if you are single and your combined income exceeds $25,000, that same tax rate applies. Combined income includes your adjusted gross income from your federal tax return, tax-exempt interest and half of your Social Security benefits.

Because Medicare premiums are income-based, as your taxable retirement income rises — through a combination of your Social Security benefits, RMDs, other withdrawals from traditional IRAs and any other sources of income, such as rent from rental properties or Airbnbs, an annuity, taxable interest and dividend income or a defined benefit pension — your Medicare premiums may increase.

If you are married and your modified adjusted gross income is less than or equal to $206,000 a year, your total individual Medicare Part B coverage is $174 a month. If your income jumps to more than $206,000 but less than $258,000, your monthly premiums will increase to $244.60. In 2024, Medicare Part B premiums top out at $594 for couples with modified adjusted gross income of greater than or equal to $750,000 a year.

There is also the potential that taxes could increase during your retirement. It’s no secret that the U.S. budget deficit is rising at a time when spending on entitlements such as Social Security, Medicare and Medicaid is also rising. That means you could be on the hook for an unknown higher amount of taxes at some point during your retirement.

Finally, there’s the fact that you’re usually living on a fixed income in retirement. When you’re working, there’s always the potential to make more money — but when you’re retired, what you have saved is all you are ever going to have.

Fortunately, there are three steps you can take to help mitigate your taxes in retirement, including converting traditional IRA assets to a Roth IRA, contributing to a Roth IRA or 401(k) if you are still working or utilizing tax-advantaged annuities or certain cash value life insurance policies.

Step 1: Convert part of your traditional IRA to a Roth IRA.

When you convert all or part of your traditional IRA to a Roth IRA, you pay taxes now so that you won’t have to pay taxes in the future or be subject to RMDs. While that can seem painful, if you’ve got the cash available elsewhere, you will be paying taxes now so you can avoid paying more taxes later. It’s important not to pay taxes with money you withdraw from your traditional IRA, because that will just increase your tax bill.

It’s important to approach this process intelligently, so you should speak to a tax adviser or accountant about how much you are likely to earn in the tax year you want to convert and how much “room” there is in that tax bracket to potentially convert some of your traditional IRA.

For example, if you are in the 24% tax bracket and you are married filing jointly with a taxable income of $250,000, you have $133,900 of “room” in the tax bracket before you would hit the next bracket, which is 32%. That means you would want to convert less than that amount to avoid kicking yourself into a higher tax bracket.

If you chose to convert $120,000 at the 24% federal rate, you would owe $28,880 in federal taxes and would also owe state taxes if you live in a state with a state income tax, although your specific tax bill will depend on your individual tax situation. Roths are subject to other rules that you should discuss with your tax adviser.

Ideally, you would work with your accountant to create a strategy over a number of years to gradually convert all of your traditional retirement assets to a Roth, while keeping yourself from being kicked into a higher tax bracket. (For more about this topic, see the article Roth Conversions: Convert Everything at Once or as You Go?)

Step 2: Contribute to a Roth 401(k) at work.

Nearly 90% of employers who offer employees a 401(k) account also offered the Roth 401(k)in 2023. By switching your contributions from a traditional 401(k) to a Roth 401(k), you will lose the immediate tax deduction that you would have otherwise received, but you will then reap the benefits in retirement.

You will also continue to reap the benefits of any employer match that you are currently getting by contributing to your company-sponsored retirement account. You will also be creating tax diversification within your retirement assets, which will give you more choices in retirement about how to take the tax hit from traditional retirement accounts.

Imagine a retirement free from at least some RMDs and taxes — that is what ongoing contributions to a Roth 401(k) or 403(b) will get you.

Step 3: Leverage life insurance and annuities.

If you don’t have money outside of a traditional IRA to pay conversion taxes but still want to minimize your taxes in retirement, or exceed the earnings limitations for a Roth account, don’t fret. You can take advantage of specific types of annuities and life insurance to get the job done.

You can purchase whole life insurance and use the cash value to pay the taxes on a series of conversions over time with a goal of converting all of your traditional IRA assets to a Roth. If you die before the full conversion of your traditional IRA assets occurs, your heirs can use the life insurance to pay the taxes that are due within 10 years of inheriting a traditional IRA.

The second strategy is to purchase a bonus annuity, which is a type of annuity contract that provides an upfront bonus upon purchase. The bonus increases your account value. You can then make partially taxable withdrawals from that annuity to pay for the taxes due on a Roth conversion.

A final word

Minimizing your taxes with a well-thought-out strategy is a gateway to a more confident retirement. It’s how you can potentially have the lifestyle you want, while paying as little in taxes as possible.

Licensed Insurance Professional. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

The information contained herein is based on our understanding of current tax law. The tax and legislative information may be subject to change and different interpretations. We recommend that you seek professional tax advice for applicability to your personal situation.

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They had done well on their investments, but the rest of their plan had no focus, and they were missing important details. These weren’t mistakes that would cause failure, but they were mistakes that could cost them hundreds of thousands of dollars over the course of their retirement. They needed to understand that when you have saved millions of dollars and enter into retirement, your focus shifts.

A cookie-cutter plan concerned only with saving and growing investments is no longer useful. You now have to consider more sophisticated planning based on taxation and estate plans. For example, people with significant savings often need to know:

• How to fund their lifestyles in the most tax-efficient way now that they no longer have incomes
• Advanced tax strategies like Roth conversions and how much to convert each year in a smart way
• If they need more sophisticated estate planning documents or trusts in place
• How to ensure tax-smart distributions to beneficiaries when they pass

Many of the people who schedule time with us are complete DIYers, as we call them. They love it, and it even seems like a hobby for them. However, many of them end up choosing to work with us for the following four reasons.

1. Advanced tax strategies.

Many DIYers who come to us feel fairly confident on the investment side of things. Although they may not necessarily have the best investment structure in place, their strategies have done well enough. The real concern comes from tax planning and knowing what strategies are out there to save money on taxes. It makes sense that many people do not know how to do this because the rules change so often. If you are not reading the tax code and staying up to date on changes, then you may be missing out on opportunities (this is something we see often with this group.)

It is also, in my mind, the most important financial pillar to plan for, considering taxes will most likely be the biggest expense in retirement. Most of the time, we are able to show DIYers enough value in tax savings and other financial planning guidance to make the fees worthwhile.

2. Lack of knowledge of tax rules and changes.

No one wants to make mistakes with their money or leave money on the table because they’re not able to stay up to speed on ever-changing tax rules. If they do not spend every day studying financial planning, they may not be up to date on everything or aware of all the strategies they are missing. If this is you, you have to ask yourself: How many retirements have you successfully planned? And is it worth trying to DIY something this important when you’ve never done it before? Would you ever work with an adviser who has no experience besides managing their personal investments? That is technically the decision you are making by DIYing your retirement.

3. Delegation.

Those who have saved successfully and are ready to enjoy their retirement are usually more interested in focusing on enjoying their time and not having to worry about reading tax law changes or following investments. For such people, the question is: Will it be worthwhile to pay a fee to an adviser to give you more time and peace of mind?

I am a big fan of delegation in my personal life. I try to delegate everything that someone can do better than me, as well as anything I do not enjoy. The time and money saved from avoiding mistakes is everything to me. I get to do what I love most: spending time with my family, traveling, exercising and working in my business.

A great example of why delegation is important occurred when I once tried to fix a plumbing issue. It took me more than 10 hours. I did not have the tools, so I had to go to the store to buy everything. Then I had to spend more time than an expert because I had not done it before and had to watch YouTube videos to learn what needed to be done. I had to waste my entire weekend. Instead, I can pay a few hundred dollars to a plumber, have no worries and save my time. I like that concept.

4. Assistance for the surviving spouse.

Many of these DIYers do a great job planning their retirements and get many of the key points established. They may be successful on their own, but when they are gone, will their surviving spouse be as capable? More often than not, we find that one side of the marriage is finance-oriented, and the other is not.

Are you confident your spouse will be able to decide how much to convert each year or how to rebalance and make adjustments to the investment portfolio? Will your spouse know which investments to use for income?

The other question to consider is: Do you want to decide who your spouse’s adviser will be, or would you rather your spouse choose? If they do not have as much knowledge about financial planning, then they may not pick the best adviser team to serve them and may not know what to look for when vetting different firms. As we all know, there are advisers out there who do not always do the right thing.

If you are a DIYer and these points don’t apply to you, or maybe you are okay without having a plan for these issues, then you may not have to worry and should continue on. Sometimes, doing it on your own because you enjoy it can be worth missing a few details. At the end of the day, it’s your plan and your choice what the future of your life savings and retirement will look like!

 Here are a couple of videos that may help you on your journey:

• This video will help you decide if you want to continue doing things on your own or seek out help.
• This video will help as you do tax planning on your own.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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Perhaps that’s because other than Social Security, we rely largely on ourselves for building savings and the plans to access those savings to the best effect when we retire. The IRS, however, has spent some time on this issue, too, and that may prove helpful.

IRS rules encourage lifetime income protection through annuities

The IRS actually offers tax incentives that can help you provide lifetime income on a tax-advantaged basis.

Tax rules encourage investors to take care of their retirement plans through the purchase of different forms of lifetime annuities. Now, it’s OK to be skeptical about supposed government largesse, but please read the following information before making up your mind.

• Single premium immediate annuities (SPIA). A portion of each annuity payment is considered a tax-free return of principal when purchased from your personal (after-tax) savings. In today’s market, for a female at age 70, only 22% of a life-only payment is taxable until her age 85.
• Fixed, variable or index deferred annuities (DAs). These annuities can be exchanged tax-free to a SPIA or deferred income annuity (DIA) with any taxable gain spread over future annuity payments. And partial exchanges from DAs are permitted.
• Qualifying longevity annuity contract (QLAC). An IRA account holder can take up to $200,000 of the account and by purchasing a QLAC can defer RMDs on that amount until age 85, when lifetime annuity payments begin.

At the same time that you’re saving money on taxes, these annuities are generating more income, and a larger portion of your total income is guaranteed for your lifetime. By the way, with an improved income plan, you may be able to delay claiming Social Security benefits and grow lifetime income from that source. Or you can use a portion of the tax savings to provide beneficiary protection on your annuity payments.

Tax benefits from adding lifetime protection to your plan

Let’s go back to our sample investor, a woman at 70, whose current portfolio is invested as below. She’s following the “100 minus age” rule with a 30% allocation to stocks.

• $750,000 in personal savings: $225,000 invested in high-dividend stock investments (30%) and $525,000 invested in fixed income investments (70%)
• $750,000 in a rollover IRA: Invested in a balanced portfolio (30% in stock investments)
• Her home is worth $1 million free and clear but is not part of her income plan

Her first-year income goal from these savings is $96,000, or $8,000 per month. And she wants her income to grow by 2% a year as a hedge against inflation. That’s a pretty aggressive starting income goal of over 6% of her savings.

To achieve that goal beyond her $5,600 from monthly interest, dividends and IRA withdrawals, she needs to withdraw another $2,400 per month, probably from her rollover IRA account. With this approach, she runs the risk of running through her IRA savings.

To do her taxes, we need to know her other income sources: She also has $36,000 in annual Social Security benefits and $26,000 from a pension.

If she leaves her plan as is, she is paying an estimated $27,000 in first-year taxes and retaining a large portion of the lifetime income risk. That’s not what the IRS intended.

Investor considers Go2Income planning

She’s open to considering the Go2Income planning method that includes income annuities to lower her taxes and her risks. With the additional income from annuity payments, she’s reducing her income risk and lowering the extra withdrawals she has to take to meet her $8,000-per-month goal to about $1,000 per month. She’s also increased her safe income from 32% to 49% of the total income from savings.

And, by bringing in the guaranteed lifetime income of the annuity payments, she’s taking advantage of the IRS rules and lowering her estimated first-year taxes from $27,000 to $21,000.

The gotcha of this plan to some is that to get the benefits of an annuity’s lifetime protection, and a higher payout, you have to give up access to the value of the annuity, otherwise known as liquidity. (If you had full access along with the annuity, you couldn’t get the benefit of the longevity credits, which is worth 15% or more in cash flow.) You can get a quote here on how much income you can get with a SPIA.

Here’s one possible answer to the gotcha. There’s an asset hiding in plain sight that can take these tax advantages and income protection and deliver additional income and liquidity. It’s your home, and the vehicle is a home equity conversion mortgage, or HECM. Let’s see how you could build it into your plan.

Using an HECM as part of HomeEquity2Income

An HECM is a type of reverse mortgage backed by the government that allows homeowners to convert part of their home equity into cash. We’ve discussed the features of an HECM in earlier articles, but the one thing we haven’t emphasized is the tax-free nature of the HECM drawdowns. Many Boomers have 25% to 40% of their net worth in home equity, and most are not accessing it for supplemental retirement income.

Integrating HECM into a new approach to retirement income called HomeEquity2Income (H2I) allows clients to access their home equity, reduce their taxes and increase their financial flexibility. See my article How to Add Home Equity to Your Retirement Income Planning to learn more about this.

H2I combines an HECM and a QLAC to provide an efficient source of lifetime income and liquidity for Baby Boomers, particularly those looking to age in place and concerned about the costs of bringing in care providers or upgrading their residence. H2I allows them to access it tax-effectively without selling or renting their house.

Compare our investor’s plan with H2I to the original plan

Here are the key benefits of the plan with H2I vs her original investment-only plan:

• No extra drawdown from our investor’s retirement savings is required. About $1,000 per month is coming from an HECM
• The percentage of income that is considered safe increases from 32% to 68%
• Liquid savings at age 85 to meet unplanned expenses are increased by over $500,000
• Estimated first-year income taxes are reduced from $27,000 to $15,000

The accumulated value of reinvesting those tax savings over 15 years for our sample investor is an additional $250,000.

Bottom line: Lower taxes, lifetime income, liquid savings — and even more

It may seem like a circuitous path to use tax savings combined with an annuity’s lifetime protection and further tax savings that come from accessing the value in your home. But with the help of the IRS, it all makes sense. If you need help in understanding this process, our Go2Specialists can explain in more detail.

Visit Go2Income to put together your own plan to step up your lifetime income and liquid savings. A Go2Specialist will be available to answer questions and guide you through the process.

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Retirement also gives you more command over your money. While you’re working, you have limited control over how often or how much you’re paid, which limits your ability to lower your taxes. But if you’re drawing retirement income from a combination of different types of accounts, you can control not only the amount you withdraw but also the sources of those withdrawals — and that could have a big impact on your taxes now and in the future. 

Conventional wisdom has long held that retirees should take money from their taxable brokerage accounts first, followed by traditional IRAs and other tax-deferred accounts, with Roth IRAs and Roth 401(k)s coming last. The logic behind this strategy is that it gives your tax-advantaged accounts more time to grow. Money in tax-deferred accounts isn’t taxed until you take withdrawals, and withdrawals from a Roth are tax-free as long as you’re 59 1/2 or older and have owned the account for at least five years. 

But in recent years, some retirement experts have questioned whether this is the most effective way to lower taxes on your retirement income and preserve your savings for your later years. Postponing withdrawals from your tax-deferred accounts could eventually lead to large, taxable required minimum distributions (RMDs currently start at age 73). 

And since those withdrawals are taxed at ordinary income tax rates, which range from 10% to 37%, large distributions could push you into a higher tax bracket and trigger Medicare high-income surcharges, says Wade Pfau, professor of retirement income at the American College of Financial Services and author of Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success. 

Roger Young, a certified financial planner and thought leadership director for T. Rowe Price, agrees. The conventional withdrawal sequence “bunches a lot of taxable income in the middle period, where pretty much all of your income is taxable,” he says. 

Retirees who have a mix of accounts could generate income more tax-efficiently by withdrawing from a combination of taxable and tax-deferred accounts, as well as making strategic conversions to Roth accounts, while remaining in a low tax bracket, Pfau says. One way to accomplish this goal is to withdraw enough from your taxable accounts to cover spending needs and income taxes. After that, calculate how much you can withdraw from your tax-deferred accounts and convert to a Roth while remaining within your desired tax bracket. 

In 2024, a married couple who files jointly can have up to $94,300 in taxable income and fall within the 12% tax bracket; for singles, the cutoff is $47,150. These thresholds are close to the points at which taxpayers can qualify for a 0% tax rate on long- term capital gains and qualified dividends (assets held for more than a year are subject to rates for long-term gains). In 2024, the 0% rate applies to capital gains and qualified dividends for singles with taxable income up to $47,025 and married couples with joint taxable income up to $94,050. 

Taking strategic withdrawals from a mix of taxable and tax-deferred accounts while remaining within these thresholds provides two benefits. You’ll pay taxes on your tax-deferred withdrawals at a low rate and reduce the size of those accounts, which will shrink your RMDs. You may also qualify for the 0% capital gains rate on income from your taxable accounts. 

Meanwhile, you’ll pay taxes on conversions from a traditional IRA to a Roth at a low rate, which will increase the amount of tax-free income you’ll have available in later years. Ideally, you should use assets from your brokerage or other taxable accounts to pay taxes on the conversions, Pfau says. 

If you postpone Roth conversions until you’ve depleted those accounts, you may have to use funds from your IRA to pay the tax bill. That’s not the end of the world, he says, because you’ll still benefit from having future tax-free income (and if you’re 59 1/2 or older, you won’t pay a 10% early-withdrawal penalty on those distributions). But it reduces the amount of money you’ll be able to invest in the Roth.

Taxes on Social Security

Converting funds in your traditional IRAs to a Roth can help reduce your taxable income later in life because, ideally, a large percentage of your withdrawals will come from your Roth. This will help you avoid what Pfau calls the Social Security “tax torpedo,” which occurs when up to 85% of your benefits are taxed. 

The formula for calculating tax on Social Security benefits is based on what Social Security defines as your provisional income (sometimes referred to as combined income), which is based on half of your Social Security benefits, plus other sources that contribute to your adjusted gross income, including withdrawals from traditional tax-deferred accounts; dividends, interest and capital gains from taxable investment accounts; and interest from municipal bonds. 

If your provisional income ranges from $25,000 to $34,000 for single filers, or $32,000 to $44,000 for joint filers, up to 50% of your benefits will be taxable. If your provisional income is more than $34,000, or $44,000 for joint filers, up to 85% of your benefits will be taxable. 

These thresholds aren’t adjusted for inflation, which means the percentage of retirees who pay taxes on their benefits has increased dramatically since the tax was signed into law more than 30 years ago. More than half of retirees pay taxes on a portion of their Social Security benefits, according to the Center for Retirement Research at Boston College. 

Withdrawals from a Roth aren’t included in your provisional income, so increasing the size of your Roth accounts through strategic conversions can help lower taxes on your benefits. If you’re able to delay filing for Social Security until age 70, which will maximize the amount of your monthly payouts, you’ll have more time to reduce the size of your tax-deferred accounts and convert some of your funds to a Roth, T. Rowe Price’s Young says. 

Charitable giving

If you plan to give funds in your tax-deferred accounts to charity, you may not need to accelerate certain withdrawals as much as you would otherwise. 

One strategy that can reduce your RMDs — and your tax bill — is to make qualified charitable distributions (QCDs), which are donations made directly from your IRA to qualified charities. You can make a QCD as early as age 70 1/2, but when you reach the age at which you’re required to take distributions, the charitable distribution will count toward your RMD. 

Although a QCD isn’t deductible, it will reduce your adjusted gross income, which will in turn reduce the provisional income used to calculate taxes on your Social Security benefits. In 2024, you can donate up to $105,000 directly from your IRA to a qualified charity. 

Alternatively, if you’re worried about giving away money you may need for long-term care or other late-in-life expenses, you can leave funds in your IRA to charity. The charity won’t have to pay taxes on the money, and you can leave more tax-friendly assets to your heirs. But this won’t absolve you from taking RMDs and paying taxes on those withdrawals while you’re still alive. 

Your estate and taxes

Shifting more of your assets to Roth accounts won’t just lower your taxes in your later years. It could also benefit your heirs if they end up inheriting money in those accounts. 

Under the SECURE Act of 2019, most adult children and other non-spouse heirs who inherit a traditional IRA or other tax- deferred account from an owner who died on or after January 1, 2020, have two options: Take a lump sum and pay taxes on the entire amount, or transfer it to an inherited IRA and deplete the account within 10 years of the death of the original owner. 

Depending on whether the original owner was taking RMDs when he or she died, the heirs may also have to take yearly withdrawals based on their life expectancy, which could mean paying taxes during their highest-earning years. (Spouses still have the option of rolling inherited IRAs into their own IRAs.) Because of confusion about the rules, the IRS has waived the RMD requirement for non-spouse heirs the past few years and is doing so again for 2024. 

The 10-year rule also applies to inherited Roth IRAs, but heirs aren’t required to pay taxes on the withdrawals or to take RMDs. That gives them plenty of flexibility, including the ability to wait until year 10 to deplete the account, thereby taking advantage of more than a decade of tax-free growth. 

If you have a large brokerage account with significant appreciation, you may want to consider preserving some of those assets for your heirs. Under current tax law, inherited investments receive a “step-up” in their cost basis to the current fair market value when the original owner dies. If your heirs turn around and sell those investments right away, they won’t pay tax on any gains, no matter how much the investments have increased in value since you purchased them. 

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

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