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Case Study: Maximizing Wealth Through Strategic Tax Planning

If you’re familiar with our approach to retirement planning, you know we prioritize tax-efficient strategies. This means leveraging tax-advantaged accounts, employing charitable giving and gifting tactics, and focusing on diversified investments like ETFs and Mutual Funds. Separately, these strategies each offer unique benefits, but their real power is unleashed when combined into a unified plan. We’ll illustrate this through a case study of Jim and Sandy, a hypothetical couple from Sarasota, Florida, who are on the cusp of retirement.

Jim and Sandy's Financial Journey

Meet Jim and Sandy, a couple from Sarasota, Florida. Jim, at 65, and Sandy, at 60, decided to reach out to a fiduciary financial and tax advisor a decade ago to optimize their investment and tax strategy before heading into retirement. 

Their financial portfolio was substantial, with a total value of $5 million, evenly split between tax-deferred IRAs and a taxable trust – half in a mix of ETFs and Mutual Funds composed of stocks for growth and half in bonds for stability. Impressive for a DIY approach. But could it be even more efficient? 

This case study will follow Jim and Sandy’s journey as they tie together the benefits of proper asset allocation, timely Roth conversions, and efficient charitable giving strategies into one comprehensive financial plan.

Asset Allocation: The Foundation of Tax-Efficient Investing

With the help of a financial professional, Jim and Sandy begin reallocating their assets in a way that capitalizes on the tax treatment of different asset types and accounts.
First, let’s look at the kinds of accounts available to them:

Next, they align their investments with the proper account. Fixed-income gains such as bonds are typically taxed as ordinary income, while capital gains produced by long-term stocks are taxed at lower capital gains rates. 

It doesn’t make much sense to create years of compound stock growth just to withdraw the gains at higher ordinary income rates within a Traditional IRA. 

Therefore, Jim and Sandy reallocated bonds into their tax-deferred IRAs, where they can grow without immediate tax implications. They will be taxed as ordinary income only upon withdrawal in retirement when they will likely be in a lower tax bracket. Given the ordinary income tax rates range from 10% to 37%, it’s essential to defer these taxes until potentially lower-income retirement years.

At the same time, they began reallocating their stocks, which benefit from lower capital gains tax rates of 0%, 15%, or 20%, into Roth and brokerage accounts. The Roth accounts offer tax-free growth, making them an ideal vehicle for the higher potential growth of stocks. Meanwhile, brokerage accounts provide lower capital gains tax rates, the ability to harvest tax losses, and opportunities for donating appreciated stocks to their favored charities.

By maximizing growth in their Roth and brokerage accounts and placing a greater emphasis on bonds in their tax-deferred accounts, they save $339,868 in taxes over their lifetime. 

Roth Conversions: A Strategic Window of Opportunity

A Roth account is funded post-tax, meaning you pay taxes on your funding source, place those funds into your Roth account, and purchase assets. In retirement, withdrawals are tax-free, and you aren’t required to begin withdrawals via Required Minimum Distributions at age 73 like you would with a regular Traditional retirement account. 
Jim and Sandy hadn’t taken full advantage of their Roth account earlier on, but they still had a chance to make the most of it for their retirement.
This graph depicts the projected income sources and tax brackets for Jim and Sandy if they choose not to implement Roth conversions. Without this strategy, their taxable income remains higher over the years, potentially placing them in elevated tax brackets as RMDs and other income sources increase.

For those retiring well before Social Security kicks in, like Jim and Sandy, a Roth conversion may make sense for two primary reasons – 

  • You’re taxed less on the conversion than you would with retirement because you’re (presumably) in a lower tax rate; 
  • Because you get taxes out of the way early, you create more tax-free income whenever you need it without Required Minimum Distributions. 
Jim and Sandy settled into their retirement years in Sarasota, Florida, and had a golden window of 5-7 years of lower tax brackets before Social Security benefits and Required Minimum Distributions (RMDs) kick in.
By converting tax-deferred accounts to Roth IRAs during lower-income years, they potentially minimize future tax liabilities and maximize tax-free income in retirement. The colored bars represent different income sources and the shaded areas indicate the tax brackets, showing a strategic shift that leverages their current lower tax rates against future higher rates.

Without a strategic Roth conversion plan, Jim and Sandy’s taxable account would hold over $5 million, and their IRA would be similarly substantial, with no assets in a Roth account. However, with the strategy in place, their brokerage account balances decrease, the IRA account sees a reduction, and the Roth account grows to $3,679,134. The total wealth is slightly higher with the strategy, but the real victory is in the vastly improved tax situation, which leads to $113,820 in tax savings.

Charitable Giving Strategies for Tax Efficiency

Jim and Sandy always had a strong desire to give back, and they can do so even more efficiently with a strategic plan in place. In our hypothetical scenario, they are advised to utilize a Donor Advised Fund before reaching their RMD age. By doing so, they can donate appreciated stocks and avoid paying capital gains tax. 

Rather than cutting a $20,000 check each year to charity, they donate assets they would otherwise owe taxes on. Plus, the DAF benefits from receiving an asset with growth potential, potentially amplifying its charitable impact. 

Receiving Required Minimum Distributions (RMDs) from their IRAs would negatively affect their tax strategy by pushing them into a higher tax bracket. Instead, upon reaching RMD age, Jim and Sandy choose to directly transfer funds from their IRA accounts to their preferred charities. This method, referred to as Qualified Charitable Distributions (QCDs), enables them to support charitable causes while maintaining a lower taxable income, bypassing the tax implications usually associated with RMDs.

Using these charitable giving strategies together, they save an additional $78,237 in taxes, and in the end, the charity receives just as much funding as it otherwise would have.

Putting It All Together

In essence, Jim and Sandy’s scenario highlights the profound impact of informed tax planning. They haven’t had to seek extraordinary investments or extend their working years; instead, they’ve smartly positioned their assets and approached charity with a tax-wise mindset. The outcome? They’ve potentially saved over $500,000 in taxes, funds that could enrich their retirement lifestyle, contribute to their legacy, or amplify their charitable endeavors.

This case underscores the importance of a holistic financial plan that grows your wealth and navigates taxes through every life stage. Ready to unlock the potential of your financial future? Click below to schedule a meeting with Walters Strategic Advisors, where we blend financial expertise with tax acumen to guide you towards a tax-efficient retirement.

For informational and educational purposes only and should not be construed as specific investment, accounting, legal or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The scenario mentioned in this presentation is not an actual client experience. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this presentation.

About the Authors

  • Douglas Walters

    Doug is the Managing Partner of Walters Strategic Partners, LLC, a licensed Registered Investment Advisory firm. Doug is a licensed Certified Public Accountant (CPA) in the state of Florida and holds a Series 65 Investment Advisor Representative securities license. He is also a member of the AICPA. With over 28 years of experience as a CPA, he believes investment decisions should be based on decades of peer-reviewed research rather than relying on the latest “hot tip” from media outlets. This empirical evidence puts the science of investing to work for his clients.

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  • Jose Joia

    Jose M. Joia is a Wealth Advisor at Walters Strategic Advisors, LLC. As a member of the team, Jose’s responsibilities involve comprehensive wealth management, planning and customer service. He has over 6 years of industry experience specializing in planning and solving unique issues his clients encounter. Jose has experience serving individual clients, business owners and non-profit organizations.

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