The Cash Flow Clock: For Retirees - Book - Page 35
The Cash Flow Clock
Tax Buckets and Estate Planning
We have discussed the impact of taxes on our estate to a certain extent, but it
is important to understand just how much of a difference the tax treatment
can have as assets are passed.
This example may be helpful:
Let’s say your Uncle Bobby has recently died leaving liquid assets totaling
$300,000 that will be passed evenly to you, your sibling that you dearly
love, and a distant cousin that you don’t care for.
$100,000 is in a traditional IRA account. $100,000 is in a non-qualified
brokerage account. $100,000 is in a Roth IRA account. If the estate
documents allow, give the brokerage account to your sibling. Give the
traditional IRA to your cousin. Keep the Roth IRA for yourself.
The amounts on each account statement are the same. But the values are
very different. The traditional IRA has a tax liability built in that your
cousin will have to pay within 10 years. The brokerage account is tax free to
your sibling, but any subsequent growth will be taxed. The Roth is not only
tax free to you now, but any growth for an additional 10 years will be tax
free (as long as it stays in the Roth). This should allow you to at least
double that inheritance, all tax free.
Remember, it is not about what you receive or how much you have. It is all
about how much of that you can keep after taxes have been paid.
We cannot afford to overlook the impact of taxes for our lifetime and our
estate.
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