When most people think about tax planning, they focus on one question: “How can I reduce my taxes this year?” While that’s certainly important, there may be a better question to ask:
“How can my family pay less tax over the long run?” Sometimes the best tax strategy isn’t the one that produces the lowest tax bill today. Instead, it may be the strategy that reduces taxes over two generations.
Why Paying Tax Today May Save More Tomorrow
A good example is a Roth conversion. Converting a traditional IRA to a Roth IRA means paying income tax today on the amount converted. At first glance, that may not seem appealing. However, depending on your circumstances, paying tax now could reduce the overall taxes your family pays in the future.
The Impact of the SECURE Act on Inherited IRAs
Before the SECURE Act, many beneficiaries could “stretch” distributions from an inherited IRA over their lifetime. Today, most non-spouse beneficiaries must fully distribute inherited retirement accounts within ten years. Those withdrawals might occur during their peak earning years, when they’re already in higher tax brackets.
A Strategy Worth Evaluating Carefully
Many retirees find themselves in a relatively low tax bracket after they stop working but before Required Minimum Distributions (RMDs) begin. That period may provide an opportunity to evaluate whether Roth conversions make sense as part of a long-term family tax strategy. By converting a portion of a traditional IRA during those lower-income years, parents may pay tax at a lower rate than their children would have paid after inheriting the account. While paying tax today may seem counterintuitive, it could reduce the total income taxes paid by the family over time. This doesn’t mean a Roth conversion is right for everyone. Your current tax bracket, expected future income, your children’s tax situation, and the amount of time the assets will remain invested should all be considered before making a decision.
Taking a Multi-Generational View
One thing we’ve learned over the years is that effective tax planning often means looking beyond this year’s return. By considering how today’s decisions may affect the next generation, you may uncover planning opportunities that would otherwise be missed.
Bottom Line
Protecting your wealth isn’t just about minimizing your own taxes. It’s about preserving as much of your family’s wealth as possible for future generations.
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