Many IRA owners are unknowingly setting up their heirs for a hefty tax bill. With the SECURE Act eliminating the stretch IRA and tax rates likely to rise in the future, proactive planning is more important than ever. If you want to leave a lasting financial legacy, consider these three strategies to protect your wealth from excessive taxation.

Understanding the “Legacy” Camp 

A few years ago, we attended a presentation by Ed Slott, CPA, “America’s IRA Expert.” He explained that IRA owners generally fall into two camps:

Non-Legacy Camp – These account holders plan to use their IRA assets for their lifetime income needs.

Legacy Camp – These individuals have other income sources and want to minimize required withdrawals to leave as much as possible for their heirs.

For those in the legacy camp, traditional IRAs are not the most tax-efficient way to pass down wealth. IRA assets are subject to both income tax and potential federal or state estate taxes. Additionally, with the national debt exceeding $37 trillion, it’s unlikely tax rates will be lower in the future than they are today. That’s why it may be beneficial to withdraw IRA funds strategically now, rather than allowing them to grow tax-deferred only to be taxed more heavily later.

We will explore three key strategies to help legacy-focused IRA owners: 1) Roth conversions to eliminate future tax uncertainty; 2) Life insurance planning using ILITs (Irrevocable Life Insurance Trusts); 3) Charitable planning strategies using Qualified Charitable Distributions (QCDs).

Roth conversions: Locking in lower taxes 

Many people hesitate to convert their IRA to a Roth, fearing it will push them into a higher tax bracket. However, strategic Roth conversions allow you to manage your taxable income while locking in today’s lower tax rates. For example, let’s say a married couple in 2025, both over age 59½, files jointly and falls within the 22% tax bracket. They have room before reaching the higher 24, 32, 35 or even top 37% bracket (at $751,600). By strategically converting a portion of their IRA each year, they can spread the tax burden while securing tax-free withdrawals in the future.

Why Consider Roth Conversions?

Future Roth distributions are tax-free and do not impact Social Security taxation or Medicare premiums.

No Required Minimum Distributions (RMDs) from Roth IRAs.

Reduces the taxable portion of your estate.

For more information, visit the Retirement Planning section on Asset Strategy’s Financial Guides. You can also reference Schedule 1, Part II, Line 26 of your tax return, which carries over to Line 10 on the front page of your 1040 (IRS Form 1040).

Life insurance planning using ILITs 

Life insurance is one of the most tax-efficient assets to leave to heirs. Unlike IRAs, which are subject to income and estate tax, life insurance benefits pass to beneficiaries tax-free.

An Irrevocable Life Insurance Trust (ILIT) removes life insurance from your taxable estate while protecting it from creditors, lawsuits, and divorce claims. IRA owners can use taxable distributions or RMDs to fund the ILIT, converting tax-inefficient IRA dollars into a tax-free inheritance.

Key Benefits of Life Insurance Planning:

• Tax-free death benefits to heirs.
• Protection from estate taxes and liabilities.
• Modern policies offer riders for long-term care and critical illness.
• Since people are living longer, life insurance costs have become more competitive. This strategy can significantly enhance the amount left to heirs while minimizing taxes.

Charitable planning strategies with QCDs 

Qualified Charitable Distributions (QCDs) allow IRA owners to donate up to $108,000 per year in 2025 (indexed for inflation) directly to qualified charities. This approach lowers taxable income while benefiting charitable organizations. Private family foundations, donor-advised funds (DAF), or charitable remainder trusts (CRT) do not qualify.

Why Use a QCD?

• Satisfies your RMD requirement.
• Lowers your Adjusted Gross Income (AGI), reducing the impact on Medicare premiums and Social Security taxation.
• No need to itemize deductions to receive tax benefits.

Each spouse can donate up to the $108,000 limit, meaning a married couple could contribute up to $216,000 tax-free. However, QCDs must be made from an IRA—employer retirement plans are not eligible.

Putting it all together 

By combining Roth conversions, ILITs, and QCDs, you can maximize your financial legacy while minimizing taxes. Consider which strategies align with your long-term goals and whether your IRA is earmarked for personal retirement income or wealth transfer. Given today’s historically low tax rates, acting now can provide significant benefits in the future.

Visit our Contact page to click the button below to speak with the Asset Strategy Advisor Team.

You can schedule a free 20-minute Discovery Call with Bruce Hardy, Director of Private Asset Management at Asset Strategy, to explore your best options:
Schedule Here 

Understanding and implementing the five pillars of financial wellness is crucial in the journey toward financial independence and security. These pillars serve as the foundation for building a resilient financial future, capable of withstanding life’s unexpected turns and thriving in times of prosperity. “Financial Wellness” is not just about having money in the bank. It’s about creating a comprehensive strategy that covers all aspects of your financial life for peace of mind and a secure future. Remember, “dreams without a goal are only dreams.”

1. Emergency Savings Accounts (ESA):

Establishing an ESA is the first pillar of financial wellness. This pillar is about creating a financial safety net to keep you from experiencing money-related hardship due to unforeseen situations. An emergency fund is essentially a high-yielding, liquid, cash reserve account that is separate from your savings or checking account. It is designated for unexpected expenses such as medical emergencies, car troubles, sudden job loss, or urgent home repairs. Think of an emergency savings account as your “what if” money.

Key benefit: By having an ESA individuals are less likely to dip into their long-term savings, such as retirement accounts or investment portfolios.

We recommend having 3-6 months of essential expenses in a safe, separate, liquid account. (3 months is the recommended minimum, and 6 months is the long-term goal.)

2. Budget

Creating and sticking to a budget is the second pillar of financial wellness. A budget is a powerful tool that gives you control over your finances, allowing you to track where your money goes each month and make informed decisions about your spending. It’s about ensuring that your spending aligns with your values and financial goals.

Budgeting involves categorizing your expenses, setting spending limits for each category, and tracking your spending to stay within those limits. Online banking or online accounting systems will help.  This process identifies unnecessary expenses, enabling you to reallocate funds towards more important goals, such as saving for retirement, purchasing a home, starting a business, or paying off debt. By living within your means and prioritizing your financial goals, you can build a solid foundation for financial wellness.  If the budget is still tight, consider creating your “side hustle.”

We recommend allocating 50% of your money toward your MUST HAVES / SHOULD HAVES, 15% toward your FUTURE (i.e. retirement), 5% toward your EMERGENCY SAVINGS ACCOUNT (ESA) until it is funded (see Pillar #1), and the remaining 30% toward your COULD HAVES / WANTS.

3. Debt

Managing and eliminating debt is the third pillar of financial wellness. Some debt, like a mortgage, debt on a rental property, or a reasonable student loan may be considered productive debt because it is an investment in your future.  Other high-interest debt from credit cards or personal loans would be considered reductive debt, hindering your financial progress.

The key to managing debt is to develop a repayment plan that prioritizes high-interest debts while maintaining minimum payments on other debts. Strategies such as the debt snowball(paying off the smallest debts first to build momentum) or the debt avalanche (targeting the highest interest rates first) can be effective in reducing overall debt.

4.  Protection – Insurance

The fourth pillar, Insurance – Protection, is about safeguarding your financial future against risks that could derail your financial wellness. Insurance acts as a protective barrier, offering financial security in the face of life’s uncertainties, such as illness, disability, property loss, or death.

Different types of insurance cover various aspects of your life: health insurance for medical expenses, life insurance to support your dependents, disability insurance in case you’re unable to work, and property insurance to protect your assets. To choose the right insurance coverage, assess your needs and potential risks thoroughly. This approach ensures you protect yourself adequately while avoiding overpayment for unnecessary coverage.

5. Investment/Retirement

The fifth and final pillar of financial wellness is investing for the future, with a particular focus on retirement planning.

Investing allows you to grow your money over time by taking advantage of compound interest, tax benefits, and the potential returns of the stock market, real estate, private investments, crypto and other strategies.

Retirement planning is about more than just saving money; it’s about strategically investing to ensure that your retirement savings keep pace with inflation and grow to meet your long-term needs. This involves diversifying your investments, understanding your risk tolerance, and regularly reviewing and adjusting your investment strategy to stay on track toward your retirement goals.

Conclusion

Achieving financial wellness is a multifaceted journey that requires attention, discipline, and commitment to these five pillars: emergency savings, budgeting, debt management, protection through insurance, and investing for retirement. By addressing each of these areas, you can build a foundational financial plan that not only secures your current financial situation but also paves the way for a prosperous future.

Remember, financial wellness is not a destination but a continuous process of making informed decisions and adjustments to your financial strategy. With dedication, discipline, and guidance from an independent advisor, you can achieve financial wellness, ensuring peace of mind and security for yourself and your loved ones.

If you need financial advice or a financial review, we would be happy to introduce you to a licensed advisor at our sister company, Asset Strategy Advisors (ASA).

ASA is an SEC registered investment advisor.

Visit our Contact page to click the button below to speak with the Asset Strategy Advisor Team.