Investors in the U.S. are keenly aware of how managing taxes can help to build wealth—as evidenced by the trillions of dollars that we’ve invested in IRAs, 401(k)’s and other tax-sheltered accounts.
What too many of us fail to consider, however, is the need to remain tax-conscious even after we’ve built our wealth. For retirees seeking to preserve and appreciate their wealth, tax-savvy decisions are especially important.
One of retirees’ key tools for tax management is known as retirement withdrawal sequencing. In plain English, this refers to the order in which you make withdrawals from various account types to fund your retirement.
Those who have saved successfully often have a combination of taxable, tax-deferred and tax-free accounts. When that’s the case, proper planning about which accounts to tap first can allow you to defer a substantial amount in taxes while maximizing the opportunity for the remaining accounts to appreciate.
Wealthy families or their advisors rarely appreciate hearing the term “generation-skipping transfer tax” (GSTT) The nuances of this specific tax law can be quite complicated, but there’s a reason for it: families and individuals often enjoy giving from one generation to the next, and the GSTT offers a fixed rate that ensures such gifts are taxed appropriately.
There is a recent study from Boston College’s Center on Wealth and Philanthropy, an estimated $59 trillion will be transferred from 2007 to 2061. While not all of that is subject to the GSTT, it does illustrate how important such a tax is today – and will become for the future (simplistically thinking about our federal deficit and the upward trending expectations for servicing our debt through higher taxes—the government will get their cut!).