For high net worth individuals, the perspective around retirement tends to shift from concerns about whether you’ll be financially secure in your golden years to how you can manage your investments, taxes, cash flow, and charitable affairs in the best possible way for yourself and your family. High net worth retirement planning can be complex for reasons we’ll dig into shortly, but the good news is that the process can be smooth with the right guidance.
In this article, we’ll walk through 4 steps to consider in the high net worth financial planning process for your retirement years to achieve your objectives and minimize your tax bill at the same time.
Do you have tax-related questions about retirement planning? Bay Point Wealth’s team of experts can help. Schedule a call with us today.
Complexities Of High Net Worth Retirement Planning
High net worth financial planning for retirement can be complicated, because many individuals have amassed numerous accounts, including individual retirement accounts (IRAs), Roth IRAs, brokerage accounts, and a pension, by the time they reach retirement. It’s essential to understand when to withdraw money and from which accounts to reduce your tax burden, which we’ll explore in the steps below.
In addition, high net worth individuals often have a net worth that exceeds their local and federal estate tax exemption amounts, which can make legacy planning tricky. It’s important to be aware of this potential complication, and consult a professional if you have questions. Now, let’s dive in.
Retirement Planning For High Net Worth Individuals: 4 Steps
1. Organize your investments in a tax-efficient way.
Where you invest your money matters. For example, if you hold stocks, such as some exchange traded funds, it’s best to keep those investments in a brokerage account or a Roth IRA, so you can benefit from tax deferred growth as well as tax savings when you withdraw the money. You can also leave taxable accounts to your children as part of your legacy plan. As a result, your children (or other beneficiaries) will receive a step-up in basis upon the account holder’s death, which minimizes the tax they’ll be required to pay on these assets if and when they sell them.
Tax planning in retirement is even more critical for high net worth individuals who hold mutual funds because those investments often have capital gains distributions, which means you could be taxed up to 25 cents per share on your investments, depending on the fund. Where possible, you should hold funds that have these capital gains distributions in tax deferred accounts. In contrast, if you hold bonds, keep them in a regular IRA. This defers the ordinary income that these investments generate.
2. Plan your cash flow.
In retirement, you have to replace a steady paycheck that you’ve relied on during your working years. It’s crucial to know what your cash needs will be, so you can plan when to withdraw money and from which accounts.
For example, there is often a sweet spot between retirement and the date you must start taking Social Security benefits (age 70), during which time your family could be in a low tax bracket. This time period applies to high net worth individuals, too.
Depending what you think your future tax bracket will be, you may want to take a large amount out of your IRA during this time through a Roth conversion (a transfer of assets), enabling you to access this money while you won’t have to pay as much tax on your withdrawals.
3. Use donor advised funds for charitable gifting.
Donor advised funds (DAFs) are powerful tools for high net worth individuals who plan to have a charitable focus in retirement. These funds offer the flexibility to transfer large sums of money to a charitable savings account without choosing a charity to donate to right away.
If you’re currently taking the standard deduction on your tax return, and you hold investments with significant amounts of capital gains, using a DAF to combine several years’ worth of charitable donations at once is an excellent way to eliminate these gains and minimize your taxes during high income years. The best part? DAFs enable you to donate your appreciated investment(s) to numerous charities over time during your retirement.
4. Make a legacy plan.
Married couples with high net worth can gift $15,000 per spouse to each of their children annually to reduce the potential total sum of their federal estate over their lifetimes. The current limit, which will likely change in the future, is $11 million per spouse, but it has been as low as $1 million as recently as 2006.
It’s essential for high net worth individuals to focus on withdrawing money from IRA accounts in the most efficient and cost-effective way as part of their legacy planning. The goal is to withdraw funds at a lower tax bracket than you believe your beneficiaries will be in when they’ll need access to the funds themselves.
Create A Solid Retirement Plan With Bay Point Wealth
Just like overall financial planning, there is no one-size-fits-all approach to retirement planning for high net worth individuals. The most important point is to put a plan in place before retirement, ideally during your highest income years when you’ll have greater opportunities for personalized, impactful planning.
At Bay Point Wealth, we stay up to date with changing tax legislation, and we have a wealth of knowledge (pun intended) around minimizing your tax bill in retirement while maximizing your investments to pass down to future generations.