Tax Concerns Threaten a Dream and a Legacy

Five years into their retirement, Jeff and Karen were happily living a comfortable lifestyle. They had saved and invested well for retirement. Approaching their mid-60s, they had reached the point in their lives where they were tired of the midwestern winters. They had always enjoyed family vacations in Myrtle Beach, SC, and began to dream of owning a simple condo there to escape the cold weather, as well as having a place of their own to bring children and grandchildren together. Was it possible?

As their assets continued to grow, the couple became increasingly concerned about their legacy and the tax implications that their investments could have on their children. With two sons and a daughter to consider, they also worried about the best way to pass their legacy while minimizing the tax burden and being fair to all the children.

The Problem

While they had more than $300K in non-qualified investments, they had also accumulated a total of $1.6M in tax-deferred retirement accounts, which were a tax time bomb for them and their children. Withdrawing from their 401K accounts to purchase a condo would immediately cause a taxable event at an unfavorable tax rate and could potentially even threaten their comfortable retirement.

The Discovery

To address these concerns, Jeff and Karen turned to our financial planning team for help. Upon analysis, our team discovered that Jeff and Karen’s fears were well warranted. The situation looked grim when we shared what our calculations showed. First, projections estimated that Jeff’s Required Minimum Distributions (RMDs) would start at $100K and would continue to increase over time, potentially topping $250K of annual taxable distributions. In addition, their kids could be facing an estimated tax burden of over $1.5M in combined IL Estate Tax and income tax on retirement accounts for their children (IRD).

This amount of RMD income, along with the potential future tax burden, was problematic, but they had hopes that an outright purchase of a winter home would alleviate some future tax burden. However, after testing the impact of using retirement funds for this purpose, it became clear that this would lead to a significant immediate tax burden, would impact future cash flow, and substantially reduce investment growth projections.

The Solution

The McBeath Financial Group team developed a comprehensive financial plan to help address the areas of concern while showing a different path for pursuing their dream vacation property.

We incorporated the purchase of a Myrtle Beach three-bedroom condo into the plan!  Instead of an all-cash purchase, we settled upon a 20% downpayment from non-qualified accounts while carrying the balance on a mortgage.  We adjusted the cash flow needs and projections accordingly, with an overall goal of building a legacy in a more tax-efficient manner.

We also focused on managed investment accounts, tailoring their investment strategies to their risk tolerance. Then, through strategic tax planning, a carefully calculated multi-year Roth conversion strategy was planned, coupled with a withdrawal strategy that involved taking carefully calculated distributions from tax-deferred, tax-free, and non-qualified accounts.

Last, wealth transfer and gifting strategies were simulated to help minimize the tax burden on them and their estate and help them pass more of their assets to their children so as to minimize tax implications.

The comprehensive plan is designed for Jeff and Karen to reduce their tax burden, the tax burden on their estate, and pass on their assets to their children with minimal tax implications. Even with a risk-adjusted growth strategy, projections show a significant improvement in projected portfolio value as well as potentially reducing the overall tax burden for them and their children by nearly seven figures.

Although financial planning is typically for the client's benefit, there is usually a residual benefit for loved ones. Instead of passing along tax liabilities, Jeff and Karen had a plan to leave their kids and grandkids a family gathering place filled with precious memories.