Paul O. Dillon, Attorney at Law

What’s the Best Way to Pass the Family Home to Heirs?

One family wanted their daughter to have the home where she grew up. They gave it to her as a gift.  However, they continued to live in it until their deaths. With the help of an estate planning attorney, the process was handled outside of their will, according to a recent article from Newsday, “Wills, trusts, sales: How Long Island parents pass houses to kids.” This ensured that the house didn’t go through probate, which can be costly and time-consuming.

In a real estate market where prices and interest rates keep rising, parents are taking steps to keep their homes in the family, building generational wealth and creating a legacy of stability. However, how this is accomplished can have consequences, especially regarding Medicaid eligibility and taxes.

The best of circumstances is when parents can hand down a home they own outright, with no mortgage or a small mortgage. When property is transferred from one owner to another, the bank or mortgage lender can demand the full mortgage payment. While the parents could continue to pay the mortgage, the lender could still demand full payment once ownership transfers.

If the mortgage company decides to demand full payment, the mortgage cost could go up dramatically, since interest rates today are higher than they were ten years ago.

Leaving a home to a child in a will is the most common way to pass the house to the next generation. If the children decide to sell the house, the basis is the value of the house at the time of the parent’s death. Beneficiaries named in a last will and testament get a stepped-up basis. This means the capital gains the heir incurs are based on the home’s value at the time of the parent’s death. The value of the home when the children decide to sell could be far higher. However, the gain is erased for tax purposes for the heirs, which is a significant saving.

If children decide to keep the house for a while, they should get an appraisal or comparative marketing analysis to prove the home's value at the time of death. If the house is sold many years later, they must confirm this value to use the stepped-up basis.

If the house remains in the parent’s name while they are living, the children may face an issue if the parent needs to apply for Medicaid for long-term care. Medicaid could deny coverage if the house is in the applicant’s name, no spouse is living in the home and the applicant’s equity is higher than the current $1.071 million limit. Medicaid might still pay for long-term care if someone owns a home under the limit and is otherwise eligible. However, it could claw back money from the Medicaid patient’s estate after they die.

Gifting a house is another way to transfer ownership. Parents can sign deeds and gift the property.  However, this needs to be done with the lifetime federal gift tax exemption in mind. While the $13.16 million level is one most people don’t need to worry about, it’s a factor for wealthy people.

Other options for transferring a home include using revocable or irrevocable trusts and transferring homes by signing over a deed while retaining a life estate on the deed, which allows parents to remain in the home as long as they live.

The best way to transfer a family home to the next generation starts with consulting an estate planning attorney to review the options. Family dynamics, tax planning and Medicaid all need to be considered. Just as with all things concerning estate planning, the best plan is to put a plan into place long before it’s needed.

Reference: Newsday (May 2, 2024) “Wills, trusts, sales: How Long Island parents pass houses to kids”

What’s the Best Way to Pass the Family Home to Heirs?

One family wanted their daughter to have the home where she grew up. They gave it to her as a gift.  However, they continued to live in it until their deaths. With the help of an estate planning attorney, the process was handled outside of their will, according to a recent article from Newsday, “Wills, trusts, sales: How Long Island parents pass houses to kids.” This ensured that the house didn’t go through probate, which can be costly and time-consuming.

In a real estate market where prices and interest rates keep rising, parents are taking steps to keep their homes in the family, building generational wealth and creating a legacy of stability. However, how this is accomplished can have consequences, especially regarding Medicaid eligibility and taxes.

The best of circumstances is when parents can hand down a home they own outright, with no mortgage or a small mortgage. When property is transferred from one owner to another, the bank or mortgage lender can demand the full mortgage payment. While the parents could continue to pay the mortgage, the lender could still demand full payment once ownership transfers.

If the mortgage company decides to demand full payment, the mortgage cost could go up dramatically, since interest rates today are higher than they were ten years ago.

Leaving a home to a child in a will is the most common way to pass the house to the next generation. If the children decide to sell the house, the basis is the value of the house at the time of the parent’s death. Beneficiaries named in a last will and testament get a stepped-up basis. This means the capital gains the heir incurs are based on the home’s value at the time of the parent’s death. The value of the home when the children decide to sell could be far higher. However, the gain is erased for tax purposes for the heirs, which is a significant saving.

If children decide to keep the house for a while, they should get an appraisal or comparative marketing analysis to prove the home's value at the time of death. If the house is sold many years later, they must confirm this value to use the stepped-up basis.

If the house remains in the parent’s name while they are living, the children may face an issue if the parent needs to apply for Medicaid for long-term care. Medicaid could deny coverage if the house is in the applicant’s name, no spouse is living in the home and the applicant’s equity is higher than the current $1.071 million limit. Medicaid might still pay for long-term care if someone owns a home under the limit and is otherwise eligible. However, it could claw back money from the Medicaid patient’s estate after they die.

Gifting a house is another way to transfer ownership. Parents can sign deeds and gift the property.  However, this needs to be done with the lifetime federal gift tax exemption in mind. While the $13.16 million level is one most people don’t need to worry about, it’s a factor for wealthy people.

Other options for transferring a home include using revocable or irrevocable trusts and transferring homes by signing over a deed while retaining a life estate on the deed, which allows parents to remain in the home as long as they live.

The best way to transfer a family home to the next generation starts with consulting an estate planning attorney to review the options. Family dynamics, tax planning and Medicaid all need to be considered. Just as with all things concerning estate planning, the best plan is to put a plan into place long before it’s needed.

Reference: Newsday (May 2, 2024) “Wills, trusts, sales: How Long Island parents pass houses to kids”

Estate Planning has Begun for Exemptions Expirations

The high lifetime estate and gift tax exemptions gave extremely wealthy Americans terrific tax breaks. In 2024, exemptions are currently at $13.61 million per person and $27.22 million for married couples.  However, the end of these levels means that taxpayers with wealth of a much lower magnitude will need to prepare, according to a recent article from Forbes, “Wealthy Families: Consider These Planning Ideas Before ‘The Sunset.’”

Some state estate taxes are tied to federal estate taxes, so people of modest wealth should check with their estate planning attorney to be sure they are properly situated before the law changes. In addition, several strategies can be considered and applied to many tax brackets.

Charitable Giving. Instead of making a gift through a trust, you might consider donating cash to a charity. Under the 2017 law, the deductions for direct cash contributions jumped from 50% of AGI to 60%, including gifts to Donor-Advised Funds (DAFs). When the exemptions end, the limit will return to 50%, so if you are charitably inclined, making a cash gift now is a good idea.

Strategic Gifting. Assets depressed in value may have tax value as gifts. You might gift them to a beneficiary or a trust, so their appreciation may occur after they have been removed from your taxable estate. This creates two wins: the depressed assets will use less of your lifetime estate and gift tax exemption, and their future growth and possible increase in value will take place outside of the taxable estate.

“Substitution Powers” Assets. If you have transferred assets to grantor trusts with retained “substitution powers," consider moving low-basis assets out of trusts at a lower current value in exchange for higher-basis assets of equivalent value. This strategy could lessen capital gains on the lower-basis assets by returning them to the taxable estate and benefit from the step-up in basis at death. Talk with your estate planning attorney about how this might work for you.

Business Owner Planning. The Qualified Business Income (QBI) tax deduction created by the Tax Cuts and Jobs Act allows select pass-through entities, like sole proprietorships, partnerships, and S-corp owners, to deduct as much as 20% of business income. There are income thresholds and other limits to consider. However, this tax deduction ends on December 31, 2025. Accelerating income now could be of great value for business owners who qualify.

Basic Income Tax Planning. Income tax brackets will return to their levels before the TCJA law was enacted. The top bracket may increase to 39.6%, so you may not want to defer income. Middle tax brackets are also expected to expand.

Alternative Minimum Tax and Incentive Stock Options. The exemption amount for the AMT increased under the TCJ. However, this will also return to previous levels, making more taxpayers vulnerable to the AMT. One workaround is to exercise incentive stock options, which aren’t considered income for regular tax purposes but are considered income for AMT taxes. The AMT could be due in the year of exercise. If you can exercise before 2026, it could be a tax-savvy move.

Estate Planning Strategies. Planning needs to be flexible, since there is no way to know if Congress will or won’t act to renew TCJA. It may seem like there’s time to make any necessary changes. However, it takes time to create and execute a plan, which is why wealthy families are acting now to protect their assets.

Reference: Forbes (March 6, 2024) “Wealthy Families: Consider These Planning Ideas Before ‘The Sunset’”

Plan for 2024 Income Taxes as the New Year Gets Underway

You may have many questions about the IRS’ adjustments. Now is the time to consider what moves to make in 2024 for the tax year ahead, according to a recent article from l Advisor, “Best Practices: 2024 Income Tax Planning.” Deferring income could provide tax savings, or bunching itemized deductions in 2024 to take a standard deduction the next year could help save money over the long run.

The current inflation-adjusted lifetime exemption—the amount the IRS permits an individual to give away throughout their lifetime without needing to pay federal gift tax—is, for now, still very high, at $13.61 million. Now is the time to speak with your estate planning attorney about options for philanthropy and grants, whether gifting to a charity, making direct contributions to an IRA, or supporting a 529 college savings plan.

A discussion should also take place with your CPA to discuss tax loss harvesting and liquidating assets depending on personal needs and market performance. Positioning your portfolio to maximize the benefit of a lower tax rate on long-term capital gains investments and qualified dividends should also be considered.

As we move through a presidential election year, tax chatter is likely to pick up. The sun-setting of federal estate tax exemption laws and the IRS’ increased scrutiny on high-net-worth individuals may impact estate planning and exemptions.

The IRS is funding thousands of new agents and adopting new technology, including AI and analytics, to improve oversight with a focus on pass-through entities including LLCs, GPs, LPs and S-Corporations, among others.

With the federal estate tax exemption anticipated to end at the close of 2025, now is the time to prepare. Maintaining the current exemptions for another ten years would cost the government $3.3 trillion, so it is likely sunset at the scheduled time. The rules cover higher standardized deductions, reduced estate tax, lower tax rates at all levels, qualified business income and a $10,000 limit on state and local tax deductions.

Reference: Financial Advisor (Jan. 25, 2024) “Best Practices: 2024 Income Tax Planning”

Why You Shouldn’t Leave Your Home to Your Children

For financial and sentimental reasons, many people want to leave their homes to their children.  However, there are many reasons making this a bad idea, says the article “Generational Wealth: 7 Reasons to NOT Leave the Family Home to Your Children” from yahoo! finance.

Homes are transferred to children in several ways. However, each has drawbacks, from tax liabilities to the risk of losing the family home entirely. Here are how homes are typically transferred:

• Trusts
• Gifts
• Inheritances
• Transfer on death deed
• Sales

A Probate Hold Up. If the home is left to the children in your will, it could get tangled up in the probate process. Probate could hold up the transfer of the home by months or even years. If the house is tied up in probate, who will take on the tasks of paying the mortgage, if there is one, maintaining the home and paying bills? Who will protect the house from vandalism, squatters, or thefts if it is vacant?

Capital Gains Taxes. If the house is left to the children and they decide to sell it, they may have to pay a capital gains tax if the home has appreciated since the owner’s death. If the home is gifted to the children before you die and they sell it at a future date, they’ll have to pay capital gains taxes based on the market value of the house when they received it and the sale price. Where will the money for these taxes come from?

More Taxes to Consider. If you place the home in a living trust and instruct it to be transferred to the children upon your death, you have not shielded it from estate taxes. If you do this to reduce assets to qualify for Medicaid, the living trust is still a countable asset in most states. Your estate planning attorney will know how this might impact your estate and your Medicaid accountability.

What if Your Children Lose the House? Gifting the home to your children, adding them to the deed while you are living, or even selling the home to them exposes the house to risk. The home may face foreclosure if any person on the deed has financial difficulties and can’t make the mortgage payments. If they go through a divorce, the house will be considered a marital asset. Your years of paying the mortgage and caring for the home will evaporate.

Do They Want the House? Parents who feel generous may assume their children want their home when they might not. They will see it as yet another piece of unfinished business left for them to manage when their own lives might be very busy with their own children and careers. If they grew up in the home and have fond memories of it, this will make selling it even harder.

Can They Afford the House? Not every child enjoys financial success. If they can’t afford a mortgage, property taxes, utility bills and the inevitable costs of home ownership, like replacing a roof, etc., home ownership may become a huge burden. If “forced” into possession via inheritance, they may have to sell it at a lower cost to get out from under the bills.

Will They Fight Over the House? Families experiencing grief are not in the best place to make big decisions and are vulnerable to spats that rise to legal disputes. If one child is living in the house and wants to keep it, will they be able to buy out the other’s shares of ownership? A discussion of what you all want to happen with the house and what is realistic needs to occur. This should be followed by a conversation with your estate planning attorney to have the plan made, whether it’s part of your will or another type of agreement.

Reference: yahoo! finance (Dec. 11, 2023) “Generational Wealth: 7 Reasons to NOT Leave the Family Home to Your Children”

How to Pass on Family Heirlooms with Fewer Estate Battles

Family feuds are more likely over Aunt Josephine’s jewelry than the family home. Putting sticky notes on personal items before you die or expecting heirs to figure things out after you’ve passed often leads to ugly and expensive disputes, says a recent article from The Wall Street Journal, “Pass On Your Heirlooms, Not Family Drama.”

Boomers handling parents’ estates and assessing their personal property are having more conversations around inheritance and heirlooms. However, there are better ways to plan and distribute property to avoid family fights over cars, jewelry, furniture and household items.

The person you name to handle your estate, the executor, typically distributes personal property. Therefore, pick that person with care and clarify how much power they will have. An example of this comes from a police officer in Illinois who has been settling his father’s estate for nearly two years. His father owned more than twelve vehicles, a water-well drill rig and two semitrailers of car parts and guns dating back to the Civil War. He also listed 19 heirs, including stepchildren and friends. He told his son he knew he could handle everyone and the stress of people who “aren’t going to be happy.”

If you want a particular item to go to a specific person, make it clear in your will or trust. Describe the item in great detail and include the name of the person who should get it. A sticky note is easily removed, and just telling someone verbally that you want them to have something isn’t legally binding.

Without clear directions, one family with five siblings used a deck of cards and played high card wins for items more than one sibling wanted. Only some families have the temperament for this method.

In one estate, two sisters wanted the same ring. However, there were no directions from their late parents. An estate settlement officer at their bank had a creative solution: a duplicate ring was made, mixed up with materials from the original ring, and each daughter got one ring.

Ask your estate planning attorney how to address personal heirlooms best. In some states, you can draft a memo listing what you want to give and to whom. It is legally binding, if the memo is incorporated into a will or trust. If not, the personal representative can consider your wishes. Make sure to sign and date any documents you create.

Get heirlooms appraised to decide how to divide items equitably, which to sell and what to donate. If heirs don’t want personal property, they can donate it and use the appraisal to substantiate a tax deduction. Appraisals will also be needed for estate tax and capital gains tax purposes.

Reference: The Wall Street Journal (July 30, 2023) “Pass On Your Heirlooms, Not Family Drama”

What Happens When Property Is Owned Jointly and an Owner Dies?

When property is owned jointly, the property may pass automatically to the other owner, passing without going through probate, according to a recent article titled “Everything you need to know about jointly owned property and wills” from TBR News Media

Your will only concerns assets in your name alone without a designated beneficiary. Let’s say you have a joint checking account with another person. On your death, the account automatically becomes the property of the surviving owner. This is outside of probate, and any directions in your will won’t apply.

Real estate is most commonly owned jointly, in several different ways and each with its own set of laws.

Joint Tenancy or Joint Tenancy with Rights of Survivorship. On the death of a joint owner, the owner’s share goes to the surviving joint owner. Simple. The main advantage is the avoidance of probate, which can be costly and take months to complete.

Tenancy by the Entirety. This type of joint ownership is only available between spouses and is not used in all states. A local estate planning attorney will be able to tell you if you have this option. As with Joint Tenancy, when the first spouse passes, their interest automatically passes to the surviving spouse outside of probate.

There are additional protections in Tenancy by the Entirety making it an attractive means of ownership. One spouse may not mortgage or sell the property without the consent of the other spouse, and the creditor of one spouse can’t place a lien or enforce a judgment against property held as tenants by the entirety.

Tenancy in Common. This form of ownership has no right of survivorship and each owner’s share of the property passes to their chosen beneficiary upon the owner’s death. Tenants in Common may have unequal interests in the property, and when one owner dies, their beneficiaries will inherit their share and become co-owners with other Tenants.

The Tenant in Common share passes the persons designated according to their will, assuming they have one. This means the decedent’s executor must “probate” the will and file a petition with the court. However, a Tenant in Common may be able to avoid probate if their share of the property is held in trust, in which case the terms of the trust and not their will controls how the property passes at death. In this case, there’s no need for any court involvement.

There may be capital gains consequences when transferring ownership interests during and after life. Such gifts should never be made without speaking with an estate planning attorney. One of the more common errors occurs when the testator fails to account for the different types of ownership and how assets pass through the will. A comprehensive estate plan, created by an experienced estate planning attorney, ensures that both probate and non-probate assets work together.

Reference: TBR News Media (Dec. 27, 2022) “Everything you need to know about jointly owned property and wills”

How Do I Reduce Size of My Taxable Estate?

The current lifetime estate and gift tax exemption is set to be cut by half after 2025, unless Congress acts to extend it, which doesn’t seem likely in the current financial environment. There are steps to minimizing not only estate and gift taxes, but also income and capital gains taxes, as reported in a recent article “Smarter Ways To Make Estate Planning Gifts” from Forbes.

It’s generally better to give property than to give cash, especially investment property. Recipients are less likely to sell these gifts and spend the proceeds. It’s more likely that cash will be spent rather than invested for the long term. Investment property is almost always a better gift for the long term.

However, property gifts come with potential taxes. To minimize the after-tax wealth, make gifts of the correct properties. There are a few principals to follow.

Don’t give investment property with paper losses. The recipient of a gift of property gets the same tax basis in the property as the person making the gift. The appreciation occurring during the holding period is taxed when the gift recipient sells the property.

If the property didn’t appreciate when the owner had it, the beneficiary’s tax basis will be the lower of the owner’s basis and the current market value. When the investment lost value, the beneficiary reduces the basis to the current fair market value. The loss incurred for the owner won’t be deductible by anyone. There is no winner here. It is best for the owner to hold the loss property or sell it, so at least they can deduct the loss and gift the after-tax proceeds.

Give appreciated investment property after a price decline. This makes maximum use of the annual gift tax exclusion and minimizes the use of the giver’s lifetime estate and gift tax exemption. You can give more shares of a stock or mutual fund by making the gift when prices are lower.

Let’s say shares of a mutual fund were at $60—you could give 266.67 shares tax free under the annual gift tax exclusion ($17,000 in 2023). If the price dropped to $50, you could give 320 shares without exceeding the exclusion limit.

When the recipient holds the shares and the price recovers, they will have received more long-term wealth. The giver would not have incurred estate and gift taxes or used part of their lifetime exemption.

This is also an example of why families should consider gift giving throughout the year and not just at year’s end. An even better way: determine early in the year how much you intend to give, and then look for a good time during the year to maximize the tax-free value of the gift.

It’s good to give property most likely to appreciate in value. If the goal is to remove future appreciation from the estate, gift property you expect to appreciate. This also serves to maximize the wealth of loved ones, especially appreciated when the beneficiary is in a lower tax bracket. When the property is eventually sold, the beneficiary likely will pay capital gains taxes on the appreciation at a lower rate than the giver would. You pass on more after-tax wealth and reduce the family’s overall taxes.

Retain property if it has appreciated significantly. When it’s time to sell the property and the loved one is in the 0% capital gains tax bracket, it’s best to make a gift of the property and let them sell it. Even if the loved one is in the 10% capital gains tax bracket, this still make sense if you’re in the higher capital gains tax bracket. But there are some things to consider. If the gain pushes the recipient into a higher tax bracket and triggers higher taxes on all their income, it won’t be a welcome gift. If there’s no urgent need to sell the property, you can ensure a 0% capital gain by simply holding onto the investment.

Give income-generating assets. If you hold income-generating investments and you don’t need the income, consider giving those to family members in a lower tax bracket. This reduces taxes on the income and the recipient is also less likely to sell the asset to raise cash when it’s generating income.

Remember the Kiddie Tax. Heirs who are age 19 or under (or under 24 if they are full-time college students) are hit with their parents’ highest tax rate on investment income they earn above a certain amount, which was $2,300 in 2022. At this point, gifts of income-producing property create tax liabilities, not benefits.

Reference: Forbes (Dec. 27, 2022) “Smarter Ways To Make Estate Planning Gifts”

Can I Use an IRA to Reduce Estate Taxes?

While death is a certainty, some taxes aren’t when IRAs are used to make charitable bequests, explains a thought-provoking article titled “Win an Income-Tax Trifecta With Charitable Donations” from The Wall Street Journal. For those who are philanthropically minded and tax-savvy, this is an idea worth consideration.

There are few better ways to leave funds to a charity than through traditional IRAs. The strategy is especially noteworthy now, given the growth in traditional IRA values over the last decade, even with the recent selloffs in bond and stock markets. At the end of 2022’s first quarter, traditional IRAs held about $11 trillion, more than double the $5 trillion in IRAs at the end of 2012.

With the demise of defined benefit pensions, traditional IRAs are now the largest financial account many people own, especially boomers. Therefore, it’s wise to know about applicable tax strategies.

The first advantage is tax efficiency. Donors of IRA assets at death win a three-way tax prize: no tax on the contributions going to the charity, no tax on annual growth and no tax on assets at death.

Compare this to donations of cash or investments, such as a stock held in a taxable account. For example, let’s say Jules wants to leave a total of $20,000 to several charities upon her death. She expects to have more than $20,000 in each of three accounts at this time. One account is cash, the other is a traditional IRA, holding stocks and funds, and the third is a taxable investment account holding stocks purchased decades ago.

A charitable bequest of assets from any of these three accounts will bring a federal estate-tax deduction. However, Jules’ estate will be smaller than the current estate tax exemption of about $12 million, so there are no federal estate taxes to consider.

Jules should focus on minimizing heirs’ income taxes on any assets she’s leaving them and donating traditional IRA assets is the way to go. If she leaves the IRA assets to heirs, they will have to empty the IRA within ten years and withdrawals will be taxable.

Giving IRA assets gets pretax dollars directly to the charities, which don’t pay taxes on the donation. A cash donation would be after tax dollars.

Donating the IRA assets to charity is also typically better than giving stock held in a taxable account. Because of the step-up provision, there is no capital gains on such investment assets held at death. If Jules bought the now $20,000 stock for $5,000, the step-up could save heirs capital gains tax on $15,000 when they sell the shares. If she donates the stock, heirs won’t get this valuable benefit.

Next, IRA donations allow for great flexibility. Circumstances in life change, so a will that is drawn up years before death could be changed over time, to give a bequest of a different size or to a different charity. It’s easier to make these changes with an IRA. One way is to set up a dedicated IRA naming one or more charities as beneficiaries and then moving assets from other IRAs into it via direct (and tax-free) transfers. Beneficiaries and the percentages can be easily changed, and the IRA owner can raise or lower the donation by transferring assets between IRAs.

If the IRA owner is 72 or older and has to take required minimum distributions, the owner can take out donations from different IRAs. Note the funds must go directly to the charity when making the donation.

Reference: The Wall Street Journal (Sep. 2, 2022) “Win an Income-Tax Trifecta With Charitable Donations”

Can I Pay Less Taxes on My Retirement Funds?

No one likes paying taxes on retirement funds. However, unless you have a Roth IRA or SEP, funded with after-tax dollars, you will owe taxes on withdrawals. However, according to a recent article from U.S. News & World Report, “How to Pay Less Tax on Retirement Account Withdrawals,” there are strategies to reduce taxes on your retirement account withdrawals.

Avoid the early withdrawal penalty. If you take money from a traditional IRA before age 59½, the penalty is 10% plus the income tax due on the withdrawal. If you are in a pinch and need the funds, you would be better off taking withdrawals from a 401(k), which is penalty free if you leave the job associated with the 401(k) at age 55 or later. You might be able to avoid the penalty if the money is needed for a large medical bill, college costs or a first home purchase.

Roll over a 401(k) without tax withholding. Changing jobs? If you take money from a 401(k) when you change jobs, 20% is held for income tax. If you do not put the entire distribution directly into a new retirement account, you could end up owing income tax and the early withdrawal penalty. One way to avoid the tax withholding and penalties is to do a direct transfer from your 401(k) to the trustee of another 401(k) or IRA. Trustee-to-trustee transfers are not generally considered a taxable event.

Manage your required minimum distributions. IRA and traditional 401(k) owners are required to take minimum distributions after age 72. Missing an RMD is expensive: the penalty is 50% of the amount you should have withdrawn, plus income taxes. However, if you are still working after age 72 and do not own 5% or more of the company you work for, you can keep delaying those RMDs from a 401(k) account held for you by your employer until you retire. For IRAs, you still have to take those withdrawals.

Be careful about distributions. Plan the distributions for the first year. You do not want to take two distributions and risk getting bumped into a higher tax bracket. The first RMD needs to be taken by April 1 of the year you turn 72 (or 70½ if you were born before July 1, 1949). The second and all subsequent distributions are taken by December 31 each year. If you delay the first distribution until April, you will end up taking two distributions, which could lead to a big tax bill.

Taking withdrawals earlier than age 72. By taking traditional retirement account withdrawals during your 60s, you can spread the tax bill over more years and enjoy the benefits of a lower tax bracket, reducing your overall lifetime tax bill. Try to take 401(k) or IRA withdrawals during a year when your income is low, like after you retire but before you take Social Security benefits.

Consider a qualified charitable distribution made directly from your IRA. Retirees 70½ or older can avoid income taxes on IRA withdrawals of up to $100,000 (or $200,000 per couple), if they make a QCD directly from their IRA to a qualifying charity. You can also donate part of your RMD and withdraw the rest of income.

Keep tax-preferred investments out of retirement accounts. If you have investments generating long-term capital gains in a retirement account, you will pay a typically higher regular income tax rate when you take the funds from the account. By contrast, you can lower the taxes by holding more highly tax investments (like Treasury inflation-protected securities, corporate and government bonds and funds generating short-term capital gains) within retirement accounts.

Balance retirement funds taxes with your overall retirement plan to try to minimize taxes. Do not neglect to discuss tax planning when you sit down with your estate planning attorney to create or revise your estate plan.

Reference: U.S. News & World Report (March 8, 2022) “How to Pay Less Tax on Retirement Account Withdrawals”