Mary Owens: Long term tax planning is the solution |

Mary Owens: Long term tax planning is the solution

Last month I covered the importance of planning for liquidity needs in estates. Simple estates – with a small checking and/or savings account, an IRA and a home with a mortgage – are frequently challenged with cash flow issues. One of the solutions for providing needed cash is to name your trust as the beneficiary to your IRA account. This process allows the administrator of your estate to use the funds from the IRA to pay your final expenses and make your mortgage payment on time. Any unused funds from the IRA account can then be rolled over into beneficiary IRAs for the desired recipients.

There is also another strategy available to gain access to larger sums of cash that can be utilized to provide liquidity in your estate but also provide a needed emergency cushion while you are alive. However, this one takes longer term planning and requires the assistance of your tax professional and your financial advisor.


Large amounts of cash are frequently needed for unexpected emergencies both pre and post death. Many of us have worried about potential crises with one eye wide open at night because of the concern of wildfires, trees falling in the wind, medical issues, and unexpected damage when power is out for an extended period of time. When these disasters strike and the cash savings outside the IRA accounts are low, the tax man smiles his way to the bank in many cases. As you take larger sums from your IRA, your tax structure can change as well. Both your federal and state income tax rates may increase. And with higher income levels, more of your social security may be subject tax and your Medicare premiums can be increased the following year as well. The number of unexpected whammies from trying to raise large sums of cash from your IRA can be very painful without proper planning.

So how do you avoid these problems? Long term tax planning with your financial professionals. But this strategy takes years to implement so you cannot wait until the last minute with a crisis facing you imminently. It takes time and thought to implement.

Under current income tax law, income is taxed in “brackets.” If you stay in the same income bracket by carefully planning your IRA withdrawals, you may be able to take more out of your IRA than needed for yearly living expenses without increasing your tax bracket. You still must pay the tax on all IRA withdrawals. However, if you can spread out these withdrawals over the years and save the extra cash in a savings account, the emergency cushions begin to grow over time. Planned carefully, you may be able to take these extra funds out without increasing your tax bracket or getting stuck with increasing the taxable amount of your social security. Let’s look at some of the federal income tax brackets for a single person to demonstrate this point.

Taxable income is taxed in the following marginal rates for 2020:
Taxable incomeTax rate
$0 to $9,87510%
$9,876 – $40,125$987.50 + 12% of the amount over $9,875
$40,126 – $85,525$4,617.50 + 22% of the amount over $40,125
$85,526 – $163,300$14,605.50 + 24% of the amount over $85,525
$163,301 – $207,350$33,271.50 + 32% of the amount over $163,300
$207,351 – $518,400$47,367.50 + 35% of the amount over $207,350
$518,400 or more$156,235 + 37% of the amount over $518,400
Provided graphic
Taxable income is taxed in the following marginal rates for 2020.

If your taxable income was $30,000 this year and you took out an additional $10,000 a year, in four years after federal tax you would have a nest egg saved of over $30,000 for emergencies without increasing your tax bracket. But if you needed $30,000 net of taxes out of your IRA for an emergency in the future, and you withdrew it all in one year on top of your normal $30,000 of taxable income, your federal tax rate would increase from 12% to 22%. Ouch! On top of the increased tax rate you would also increase the amount of your social security pension that is included in your taxable income. You would have gone from including only 50% of your social security in your taxable income (or even zero potentially in some situations) to a whopping 85%. Double ouch! If the main source of your extra emergency cash is coming from your IRA, the tax man is one of the many reasons to plan for liquidity needs before a crisis hits.

I must emphasize that taxes are complicated. Use the assistance of your tax professional to figure out your ideal methodology for raising emergency cash over time. These strategies are available to individuals over 59.5 years of age, most likely retired and needing to build an emergency cash reserve.

Many people did not take the normal withdrawal out of their IRA this year because the required minimum distributions were waived for 2020 as a portion of the relief package provided for COVID. If you are low on cash, I highly suggest you contact your tax professional to see if you should take some cash out of your IRA this year anyway. If your taxable income brackets are lower than normal, this might be a good year to start that emergency cash reserve or increase it more than normal because of tax savings opportunities in the future. As the year draws to a close, the deadline for 2020 IRA withdrawals is rapidly approaching.

Have a wonderful Holiday Season and Happy New Year. May we all have a happier and less stressful 2021. Take care and be safe out there! See you in 2021!

Mary Owens, Founder, Owens Estate & Wealth Strategies Group, Financial Advisor, RJFS, 426 Sutton Way, Suite 110, Grass Valley, 530-272-7500. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.


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