When discussing long-term goals such as retirement, college education for children and grandchildren, long-term health planning, and estate planning, it is paramount to understand various tax implications, pitfalls, and opportunities.
From using specialized tax-advantaged investment vehicles to defining long-term tax-friendly strategies, Eureka Wealth Solutions could help clients realize very significant multiyear savings. Please refer to our Tax Planning page for more information about the services we provide.
Long-Term Planning Considerations
Long-term tax planning is driven by a number of considerations including:
- Current and future income projections
- Current and future spending projections
- Future tax rate assumptions
- Rate of return assumptions
- Longevity assumptions
- Type of goal: retirement, education, health, business, large purchase, or estate and legacy
Major tax-deferred accounts include:
- 401(k) / 403(b) / 457 –Corporate / Nonprofit / Government Retirement
- IRA / Roth IRA / Inherited IRA – Individual Retirement
- Solo 401(k) / SIMPLE IRA / SEP – Small Business Retirement
- 529 Plan / Coverdell – Education Savings (find out more in our dedicated College Planning page)
- UGMA / UTMA – Accounts for Minors
- HSA – Health Savings
- Donor-Advised Funds – Charity Donations
Most of these accounts other than IRAs are typically held away, as in, away from advisor-managed platforms. Yet, we can still help manage those types of accounts – see how.
There’s a plethora of tax-deferred accounts established specifically for retirement. A high-level comparison of the major types is shown below.
Conversion Strategies
Various conversion strategies exist to capture tax benefits based on your situation:
- 401(k) Plan Conversion to IRA – Various considerations are illustrated below
- IRA Conversion to Roth IRA
- Enjoy tax-free withdrawals in retirement
- Watch your money grow tax-free for longer
- Leave a tax-free inheritance to your heirs
- Pay taxes now
- Backdoor Roth Contribution
- Contribute to IRA post-tax
- Convert to Roth immediately
- Bypass income limits
- No other IRA = No taxes due
- Mega Backdoor Roth Contribution
- Make a non-Roth, after-tax contribution to their 401(k)
- Roll it out of the 401(k) into a Roth IRA
- Bypass Roth income limits
- Qualified Longevity Annuity Contract (QLAC) – Deferred annuity funded with an investment from a qualified retirement plan or an IRA. It is exempt from RMD rules until the owner reaches age 85 and has a maximum of $200,000.
- Qualified HSA Funding Distribution (QHFD) – Allows funding your HSA with your IRA, a once-in-a-lifetime transaction. You must remain eligible for more than 12 months after the transfer (known as the testing period). It makes most sense before age 59.
- 529 College Savings -> Roth IRA – Contribute to a Roth IRA both tax-free and penalty-free using 529 plan funds designated to the beneficiary.
- The 529 plan must be more than 15 years old
- Subject to annual Roth IRA contribution limits
- Up to a lifetime limit of $35,000
- Excludes contributions and earnings on contributions from the last five years
Tax Strategies
Additionally, many more complex tax strategies exist that could make sense for your long-term planning. For example:
- 706 Portability – An election that can be made where a surviving spouse can use the unused portion of a deceased spouse’s estate tax exemption.
- IRA Trust – Creating a trust to inherit your IRA upon your death in order to ensure that a beneficiary’s creditors cannot lay claim to those funds.
- Private Placement Life Insurance – Similar to other life insurance strategies, with the important distinction of being able to invest in additional vehicles and enjoy low tax rates on the income generated from those investments.
Contact us to learn more about these or other strategies that may apply to your personal situation.
