The Biden administration is proposing changes and, in this post, we’ll look at what they might mean for your retirement. The first one is only going to impact people who have assets totaling over a million dollars. But the second proposal, in my opinion, is going to impact everyone. It’s going to affect how much tax you pay when you withdraw from your IRA and 401k.

How Much Tax Will You Pay On Your Estate?

The first proposed change has to do with how much tax you could pay on your estate. When you pass away, there’s really only three places that you can leave your money:

  • heirs,
  • charity, or
  • the government.

Most of the people that I talk to prefer to leave more money to the first two than to the last one. I’m sure you feel the same way. And as I said before, this will impact those who have more than a million in assets when they pass away, because the Estate Tax Exemption Limit that I’m hearing mentioned by the Biden Administration could be changed from the current limit of around $11 million, down to just $3.5 million. If you think you’ll never have that amount of money, remember that if you’re in your fifties or sixties, with $1 million at 7 percent growth rate for the next 20 years, that gets close to about $4 million. And that does not include your house value or other real estate, or any of the other assets you have. The estate tax calculation includes all of these things.

So, what does that $3.5 million exemption mean?

If this proposed change is approved, and you are an individual with an estate over $3.5 million, anything over that amount could be taxed by the federal government. For example, if you pass away with $4.5 million in assets, the million dollars that’s over the exemption amount could be taxed at 40 percent or $400,000 extra going to the government. Note that this does not even include what your state’s estate tax might be. That’s a whole different calculation. But just from this example, you can see that it could mean some big, big dollars.

There are ways to get around taxation, but, first, if you’re serious about estate planning, don’t take this video as advice. I am not an estate planning attorney. I just help people and have talked with some estate planning attorneys around this area. So, if you’re interested, I recommend finding one and discussing these strategies with that individual. But here are a few quick ideas to have in your back pocket when you do talk with an attorney. The first one has to do with paying less to the government by getting more to charity. And then the second one has to do with paying less to the government, by getting more to your heirs. And as you can tell, the main goal here is giving less to the government, if you can.

Giving More to Charity

When you give money to charity, it’s not included in your estate. Many people will designate charities as one of the beneficiaries on their accounts. When you do this, money going to a charity should be excluded from your estate tax calculation when you die. Another option is to set up a donor-advised fund as a beneficiary. This account can be set up to grant out certain dollar amounts or percentages of that donor-advised fund value even after you pass away. It’s a nice way to continue to support smaller organizations that you care about who might not be able to handle a big lump sum payment all at once.

Giving More to Heirs

While you’re alive, you can manage where your money goes. And, you can see the benefit and the blessings that you can give to the charities. You can see first-hand the impact that your donation makes on those charities. When you give to your family members, or friends, you can see the blessing and the impact of that gift. Why not have two parties enjoy that––the receiver, and then also you, the giver. We know that when you do give, you actually feel better if you can see a change happening.

“Do your giving while you’re living.” -Ron Blue

I have clients who are actors and they’ve done pretty well for themselves. Some of them have a lot of friends who are struggling actors. And this past year has been so difficult for a lot of actors because of no work. So my clients have been secretly helping those who really struggled this past year. And it’s been giving my clients a lot of joy to see the impact that they’re making on other people.

How Much Tax Will You Pay on Your Pre-Tax Accounts?

This proposed change from the Biden administration has to do with the amount that you might have to pay on the withdrawals from your 401ks IRAs, and any pre-tax accounts that you have in your retirement plan. In my opinion, you don’t have to be a millionaire for this to impact you. It just might sting a big more if you do have over a million saved. One traditional withdrawal strategy says: defer your IRA and 401k withdrawals as long as you can, because it’s all tax-deferred growth. And I could see the reasoning of why you’d want to defer that.

But when we model out these specific withdrawal strategies and tax plans for our clients, we find that waiting to take money from pre-tax accounts could be causing them to pay more tax than necessary over their lifetime. Often by waiting to take pre-tax money until they get to the Required Minimum Distribution age*, they’re moved to a higher tax bracket. This means that they’re paying more tax than what they were expecting in their seventies. The way around this is to design a retirement income plan. At Streamline, we run a retirement income system that gets the investment plan, income plan, and tax plan all working together. We’ve seen that it often makes sense to withdraw more money from pre-tax accounts first and then pay the tax now versus waiting to pay it later.

But again, don’t take that advice and just implement it based on this post because I don’t know your specific situation. Sit down with someone and model out your specific scenarios to see which one allows you to pay the least amount of tax.

What About Biden’s Tax Changes Right Now?

The Administration has proposed raising rates tax rates on people with incomes of around more than $400,000. But the question we’re asking is: do we really think that tax brackets are going to be the same five or 10 years from now? Now I don’t have a crystal ball, but I do know that we’re at historically low tax rates right now. And when we look at history, it moves in cyclical nature. I don’t want to make any big assumptions; that’s why we model out a bunch of different scenarios, whether its tax rates going up, saying the same, or going down. To see a visual example of what we do for our clients, click here to see a video illustrating several different scenarios.

* The Requirement Minimum Distribution age right now is 70 years old. At this age, you are required to withdraw from your pre-tax monies.