Year-End Tax Planning for Investors with Significant Wealth Video from Savant Wealth Management

Speaker 1:

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Chase Hutter:

Welcome to today’s Savant webinar, and thank you for joining us. We’re looking forward to discussing year-end tax planning for high-net-worth investors. My name is Chase Hutter, and I’m a financial advisor and Certified Financial Planner with Savant at our office in Vienna, Virginia, just outside of our nation’s capital. I’m excited to welcome Joe Marmorato, who’s a senior tax strategy advisor, who’s going to join us today.

Joe Marmorato:

Thank you, Chase. Glad to be here today. We have a lot of great things to cover in this next hour, so take it away.

Chase Hutter:

Thank you, Joe. Yeah, we have a thorough presentation today, a lot of great details. We’re going to discuss how your investment portfolio will interact with your taxes, some charitable gifting ideas, then we’ll talk about what you can do with those pesky RMDs, Joe. And lastly, some estate planning opportunities that everyone should really consider. So let’s begin with tax diversification and coordination. Ultimately, this is really talking about how your investment portfolio impacts your taxes. One of the most common things that folks may talk about when discussing their taxes in their portfolio with their advisor is really the overarching idea of asset allocation. That’s a mixture of stocks and bonds that you may have in your portfolio. And here at Savant, we like to look a little bit under the hood to see what’s really making the engine tick. All of your investments and your account types are taxed differently, and unfortunately taxes can act as a major anchor and be a significant detractor from portfolio returns.

So we really like to focus on what we call after-tax return. In other words, how much of the growth in your investment account are you retaining each year versus giving some to Uncle Sam? After-tax return is what’s really important and what really matters at the end of the day. We’ll discuss that in more detail here in a few moments. We also want to discuss how an efficient retirement plan combines asset allocation, asset location, a focus on your tax situation to ensure that you have a tax-efficient cash flow plan to fund your retirement, and the entire idea is really to reduce the unexpected spike in your tax rates. A tax bill is one thing admittedly, but a surprise tax bill is entirely another.

So I alluded just a few seconds ago to the fact that each investment account and account type has different tax ramifications. Where you place what investment is a major decision because we really want to focus on maximizing long-term growth, but also asset preservation. So let’s review the account types and the investments of each account type shown here on the screen. We’ll start on the far left, and that’s with the Roth IRA. The assets within a Roth IRA grow tax-free and your distributions avoid Uncle Sam entirely, and those are tax-free as well. So this is really the best of both worlds, and we’d like to see your Roth IRA grow as fast as it possibly can. And so we’re very intentional about which investments we want in your Roth IRA. That’s really the growth engine of your portfolio. It should be comprised with things like small value stocks, emerging market stocks, because at the end of the day, this is where we want the highest return within your portfolio.

If we look to the middle of the screen, that’s your Traditional IRA. This is the most tax nasty account that you can have. Because of that, and really the reason why it’s tax nasty, is because at the end of the day, Uncle Sam will take his cut when you start taking your distributions. The benefit to a Traditional IRA though is it can be a shelter to any income that’s paid you from your investments. So think about a bond, for example. A bond will pay you interest. If you receive that interest in a taxable investment account, which we’ll talk about here in just a moment, you’re going to be on the hook to owe your income tax rates on that income that’s paid you from those bonds. So what we really like to do is take that very same investment, you place it in the Traditional IRA, and now you’re retaining more of your cash flow and paying less in taxes.

If we go to the far right, this is what we call your taxable investment account. It could also be referred to as a joint brokerage account that may be owned by you and your spouse. This account has very different tax treatments than the IRAs. Your taxable investment account is subject to capital gains anytime you buy or sell a security potentially. Capital gains are taxed at a friendlier tax rate than your income tax rates. So there’s a little bit of a spin, which is a positive at the end of the day. However, as I mentioned earlier, any interest or dividends that are paid into this account, you could owe your income tax rates. Depending on where you are in your personal tax situation, this could be anywhere from 22, 24, all the way up to 37% on that income. If you take the very same investment, place that in your Traditional IRA, you pay no taxes on that income.

So really, if we zoom out and look big picture, a focus on not only which investments to own, but where you own them can create a very different tax portfolio and a much more tax-efficient portfolio that’s more aligned with your long-term goals and your overall tax situation. I must admit that this is a really fun chart for us to discuss because ultimately it illustrates the tax drag that taxes can have on your investment. So in this chart, we’re assuming, and we’re making a big assumption here, but give us a little bit of a leash if you don’t mind, but let’s assume that you have an individual stock and it’s done very well. Perhaps this is a stock that you’ve owned for a long time and you’ve bought it, you held it, and you really would like to sell it, but you’re afraid of the tax bill.

This could also be company stock, for example, from your compensation package at your employer. But nonetheless, let’s assume that you choose to hold it because there could be adverse tax impact. So the chart is really a comparison of what you do. Do you sell today or do you want to hold long-term? If you sell today with our chart here, we’re assuming that you’re in a 20% capital gains tax bracket, but also subject to a 3.8% net investment income tax. Assuming a 7% growth rate, we’re going to see a material difference in what the outcome is over a 20-year period. If you sell the stock today from that $10 million investment after tax, you walk away with $7.6 million. If you invest those proceeds and you earn 7% over the following 20 years, you walk away with $27.5 million, still done really well. However, if you keep that stock, get the same market-like returns, now your investment’s worth over $36 million.

That’s a difference of nearly $10 million. That’s what we refer to as a tax drag or a tax anchor. We must admit though that there is a little bit of good news in modern markets. We have some great tools in our toolbox for those who may find themselves in this situation that have significantly appreciated investments, and we’d be more than happy to meet separately to discuss how we can potentially help you diversify, but also manage those long-term tax bills. This is really the things we love to do here at Savant is help you manage complex portfolio decisions. I’m going to turn it over to Joe here, and Joe’s going to talk about some charitable gifting ideas. So Joe, if you don’t mind, go ahead and take it away.

Joe Marmorato:

Thank you, Chase. So yes, want to spend a couple of minutes here talking about various charitable giving options, especially options here that are available for the end of the year that you may want to consider taking advantage of. So some tax-smart gifting options that I’m going to be covering on the next few slides, we’re going to be talking a little bit about bunching donations, some donor-advised funds, qualified charitable distributions, also going to be talking a little bit about charitable trusts and estate planning as well. So let’s start off here with the bunching strategy. So what is the bunching strategy? Well, let’s take a step back first. When you file your tax return each and every year, you are entitled as a taxpayer to the standard deduction. So as you report your income on your tax return, you’re eligible to deduct a certain amount against that income that the government allows every single year.

So as you can see on the first bullet point here, the standard deduction for 2026 is $16,100 for single filers and $32,200 for married couple to file jointly. Again, any taxpayer is entitled to this standard deduction. However, if you have other expenses that may qualify as an itemized deduction and those happen to exceed your standard deduction, well, you’re eligible to itemize deductions. Itemized deductions may include medical expenses, state and local real estate taxes, charitable contributions, mortgage interest. The big issue here is back in 2017 with the Tax Cuts and Jobs Act, that tax law significantly increased the standard deduction. That meant that a lot more individuals no longer itemized on their returns. So for individuals who were very charitably inclined, who would give away to charity each and every year who typically received a tax benefit, started to no longer receive a tax benefit because they started claiming that standard deduction.

So that’s where the bunching strategy really came into play. So for individuals who are charitably inclined, it may be advantageous to actually bunch a couple of years’ worth of charitable contributions into one tax year so that you are eligible for a larger deduction. I’m going to illustrate how this works more clearly on a graph and a couple of slides, but this bunching strategy is really advantageous for those who are looking to make significant charitable contributions, at least to charities over the course of a couple of years here. So when you do this and you itemize deductions in that one year because you made a larger than usual charitable contribution, it’s likely that in future years you will be taking advantage of the standard deduction because you already heavily loaded the itemized deductions in the prior year. Again, going to illustrate this in a couple of minutes to hopefully provide some clarity on it.

But before I do, I want to highlight one additional item here, and that’s the third bullet point on the slide. As many individuals take the standard deduction, that’s typically all you’re entitled to claim. However, starting this year in 2026, even if you take the standard deduction, taxpayers are eligible to deduct an additional amount for charitable contributions that they make. So for single taxpayers, it’s $1,000. For couples who file jointly, they can deduct up to $2,000 in addition to that standard deduction. Again, that is brand new for 2026, so keep that in mind as we only have a couple of months left here in the year. If you’re looking to give to charity but anticipate taking the standard deduction, make sure you hold onto any written acknowledgements in order to claim those deductions there. This only applies to cash contributions and contributions to a donor-advised fund do not qualify. So that’s going to lead into my next slide as to what is a donor-advised fund.

So, at the top here, we see use appreciated securities and charitable giving, and a lot of times you see this with donor-advised funds. So in that first blue box there, you’ll see a donor-advised fund works somewhat like a private foundation. You make contributions to this fund and you can receive an upfront tax deduction. You can then recommend grants to charities over time. So a donor-advised fund is really like a separate account here that the qualified charitable organizational fund there, that eligible taxpayers can contribute funds, whether it be cash, you can contribute highly appreciated securities, and you may be eligible to contribute other assets as well. So why would you choose to use a donor-advised fund versus giving a charity outright? Well, again, you make contributions and receive that large tax deduction upfront, but can recommend those grants to charities over time. That’s where the bunching strategy really is advantageous to use with a donor-advised fund.

In the middle there, you’ll see you can use donor-advised fund to lump multiple years worth of contributions in a single year. This strategy can help you itemize your deductions. So for instance, what if you wanted to give to ABC charity every year, and let’s say you gave $10,000. Well, perhaps you weren’t able to itemize deductions because your standard deduction exceeded your itemized. Well, if you ended up gifting five years worth of those donations to a donor-advised fund, that allows you to take that big tax deduction in that initial year that you fund the account, but then you can give that $10,000 to ABC Foundation every single year for the next four years, and you pay grants out of that donor-advised fund. Now, keep in mind, once those funds actually leave the donor-advised fund and go to the respective charity, you’re not eligible for another tax deduction.

You already received that benefit when you front-loaded the donor-advised fund, okay, but it’s a great way to ensure that you can receive a tax benefit and still satisfy your charitable intentions there. Now, using appreciated securities is another advantageous way to give, and why is that? Well, when you contribute highly appreciated securities to a donor-advised fund, you also receive the tax benefit likely for the fair market value of those securities so long as you have held that position for over a year. And when you give those securities to the donor-advised fund, not only do you get that tax deduction, you can avoid the capital gains tax on the gain on that security. So that’s a double benefit there. You get the tax deduction for the contribution and avoid tax on the gain on the position. So highly appreciated securities are a really great asset to contribute to these donor-advised funds.

Now, the donor-advised fund is able to take that position and sell it completely tax-free, so the donor-advised fund can then hold the cash that you would like to have to make those grants to your respective charities. Donor-advised funds can also invest in certain funds that the custodian allows. So when you make contributions to the donor-advised fund, you can hopefully allow that account to grow over time as well, which will increase the ability to make additional grants to charities that you’d like. So consider the strategy for high-income years, especially if you’re going to be in a high marginal tax bracket, maybe a large contribution to a donor-advised fund can help reduce your tax burden there, bringing you into a lower tax bracket. So I’d like to include this slide, just basically summarizes everything I said in a nice simple chart here for some visual learners.

So you, in the blue there, contribute property to the donor-advised fund. Again, that property can be cash, securities, can even be real estate, perhaps some business interests. Every custodian that has a donor-advised fund has certain requirements and they allow certain assets to be contributed, so you have to check with them to see what they allow for. But once those funds or assets are in the donor-advised fund, you can then make grants to your respective charities to fulfill your charitable intentions.

So how does bunching really benefit you? So I thought this graph here was really helpful. So let’s use this as an example. A couple typically gives $15,000 a year in direct gifts. All right? So looking here at the various five years, you’re going to see the teal bars there. Now, this is their itemized deduction, this couple. They have a 15,000 charitable contribution and they have a $10,000 in property taxes. So every year their itemized deductions are $25,000. Well, guess what? They’re not benefiting from those itemized deductions because you will see that teal horizontal line going across the screen there. That’s the standard deduction. So what this shows is even though they are charitably inclined in making donations and they’re paying property taxes, their standard deduction is still higher, so that’s what they’re claiming each and every year. So option one, if they just gave $15,000 out to charities for the next five years, their total deductions will be $161,000.

That’s the standard deduction of $32,200 times five years. Now, if they were to bunch those $15,000 contributions into one year, meaning that the $75,000 charitable contribution, well, they have $75,000 of charitable contributions and $10,000 of property taxes. That means their first year tax deduction will be $85,000, well over the standard deduction of 32,200. So then in years two through five, you’ll see that blue column, the dark blue, their itemized deductions are only going to be the property taxes for $10,000. So in those years, they’re going to end up claiming the standard deduction. So what that means is, as you’ll see at the top, option two, when you bunch those charitable contributions, you now get total deductions of $213,800 of deductions over five years. That’s almost $50,000 greater than had they not done that in option one. So I think this graph really illustrates how bunching contributions and using a donor-advised fund can be really advantageous to certain taxpayers.

So there’s another charitable vehicle that’s available to certain individuals, and this is known as a qualified charitable distribution, QCD. Now, Chase is going to touch on some IRA planning in a couple of minutes here, but I just want to touch on this here because we’re talking about charitable gifting, right. So there is an opportunity for individuals who have IRA accounts who have attained age 70 and a half to use some of those IRA funds to give directly to charity. So why would you want to do that? Well, the best part is you don’t need to itemize deductions to do this. So for taxpayers who claim that standard deduction, they can also make these qualified charitable distributions from their IRA and receive an even larger tax benefit in addition to that standard deduction. So for the 2026 tax year, taxpayers who are age 70 and a half can contribute or make qualified charitable distributions up to $111,000 per person.

Now, you’ll see a note here that says this has not changed to 73. That’s because individuals with these pre-tax traditional-type retirement accounts have required minimum distributions that they must start taking once they attain a certain age. A couple of years ago, this used to be 70 and a half. Then it was increased to 72, now 73, and eventually will be age 75, but Congress did not change the age for QCDs. So again, if you’re 70 and a half, maybe you’re not subject to required minimum distributions yet, but you can still make a QCD, and by using those funds to give to charity from your IRA, that can reduce your future required minimum distributions. So this is a really beneficial vehicle here for individuals who are eligible to do so. So you can use all or part of your required minimum distribution and exclude it from taxable income, right, because when you take distributions from your IRA, those are generally taxable.

But if you give that to charity, it is exempt from federal taxes. Now keep in mind, this is for federal taxes. Some states also allow for this, but not all do. So just keep that in mind. Some states may not allow for QCDs and would in fact tax the entire distribution that comes out. Third bullet point here cannot come from a 401(k), 403(b) or 457(b) plan. These employer-sponsored retirement plans generally don’t allow these QCDs. Now, there are some talks in Congress about potentially changing those rules in the coming years, so we’ll keep an eye out for you. But for right now, these QCDs can only be made from Traditional IRAs. At the bottom, you’ll see IRA custodians may identify QCDs on form 1099-R. So when you distribute funds from an IRA, you get a tax form, a 1099, to report that income on your tax return.

Many years have gone by where there is no indication on that 1099-R tax form indicating that you made a QCD. It’s just going to report a taxable distribution from your IRA. It is very important you tell your accountant any QCDs that you made during the year so that they can reduce that taxable distribution accordingly. Now, there is a new code, code Y, that can be shown on those 1099-Rs, but it’s brand new and not all custodians are required to do it just yet. And it’s also not going to necessarily indicate the amount of QCDs, just that there may have been some QCDs within that distribution. So again, in red there, very important. Tell your tax preparer about any QCDs that you made from your IRA when you hand them your tax data in the spring.

All right, and I want to also talk here about some more advanced strategies real quick. So we have charitable remainder trusts and charitable lead trusts. So let’s start on the left side here, charitable remainder trusts. This is an irrevocable trust that can be set up to pay amounts to non-charitable beneficiaries with a remainder that goes to charitable beneficiaries at the end of the defined term. So that non-charitable beneficiary can be yourself or any other individual there. Why would you want to do this trust over perhaps a donor-advised fund? Well, I will say since the introduction to donor-advised funds, the use of these trusts have become less and less over the past couple of years, but these trusts are great if you are looking for an income stream and to provide a charitable contribution to an organization here. So again, it allows for a big large funding upfront for which you can receive an annuity type payment every year, and at the end of that term, any remaining balance will be given to charity.

It allows for an upfront tax deduction similar to a donor-advised fund, but is a bit more complicated and requires additional administrative work that many individuals may not want to take on. And that’s why a lot more individuals started leaning more towards the donor-advised fund because it’s a simpler tool there. Now, you also have a charitable lead trust, which works pretty opposite of a charitable remainder trust. That’s an irrevocable trust that pays an amount to charitable beneficiaries for the first couple of years, and then any remaining amount in that trust goes to the non-charitable beneficiaries at the end of the term. All right?

Chase Hutter:

Thank you, Joe. A lot of great details about how to be tax efficient in your giving and in your charitable efforts. So let’s turn a little bit and focus on some of the end of the year IRA details and planning. The devil’s really in the details here, folks. There’s a lot of information on this chart, and I really treat this as a good final end-of-year housekeeping sheet. It’s a great idea to complete these before the holidays roll around because we want to make sure that you’re focused on carving a Thanksgiving turkey rather than trying to fill up your HSA last minute and you might lose a finger. But on the chart here, let’s talk about the difference between employer plans, IRA limits, and your HSA. To start with your employer plan, this is something like your 401(k) that Joe spoke about just a few minutes ago, but your 401(k) has a limit of $24,500 for 2026.

That is your contribution as the employee, not the employer. This does not consider your employer contributions. This is just what you’re going to put in there through your paycheck. 2026 has also brought to us an interesting change. We always like to joke here that the IRS likes to make things easy on us, and one of their changes here over the SECURE Act was that in recent law, if you’re over the age of 50, you’re allowed to contribute an additional $8,000 to your 401(k). That’s pretty helpful in way of adding more to your retirement savings. However, there’s a nuance here that’s worth noting. If you’re over the age of 50 and you would like to contribute the catch-up, what you made last year, your 2025 income is very important to know and keep on hands. If you made more than $150,000 last year, your catch-up contribution of $8,000 is required to go into the Roth portion of your employer plan.

This is new law. This is brand new law this year. Employers have to scramble to create Roth components of their 401(k) plans this year. So this is something to keep a close eye on. So there’s a little bit of a benefit. Forcing $8,000 into the Roth component of your 401(k) is of course a benefit, but you’re not able to reduce your income by that $8,000. It does not offset your income. So in total, when you combine the base amount of $24,500 plus your catch-up of $8,000, we always like to joke and say, “But wait, there’s more.” This is also not an infomercial, but there’s always more. If you’re between the ages of 60 and 63, you’re eligible to contribute an additional $3,250. That’ll take you to $11,250 if you’re over the age of 50, but between ages 60 and 63. So in the aggregate, you can contribute $32,500 if you’re over the age of 50.

If you’re between ages 60 and 63, you can contribute $35,750 to your 401(k) plan. That’s some pretty big savings. Now let’s focus on the IRAs, the Traditional IRA and the Roth IRA. These have very different rules and they’re very much dependent on your income. You can contribute $7,500 to both your Traditional and Roth IRAs for 2026. This is an amount that does change year over year, and the IRS notifies us pretty late in the year as to what our contributions can look like for the year in advance. If for over the age of 50, you also can contribute an additional catch-up. That’s $1,100 for 2026. That means you can contribute $8,600 to your Roth IRA or Traditional IRA so long as you have equal or above that amount in earned income. Earned income being the operative word there, because this does not mean you can contribute if your only source of income are things like pensions and Social Security.

It must come from wages earned through employment. Lastly, let’s talk about your HSA. This is your health savings account. The health savings account has had a material evolution over the last few years, and it’s become one of the most tax-advantaged accounts that anybody can have. The contributions you put into the HSA are deducted from your taxable income. The monies that are in your HSA grow tax-deferred just like an IRA would. And the real benefit is at the end of the day, you can take distributions from your HSA totally tax-free, so long as they’re for qualified medical expenses. Again, the IRS loves to make things easy on us, so there’s a lot of nuance here under what your contribution amount should look like. If you are just an individual, you can contribute $4,400 for yourself. If you’re a family, it’s $8,750. Much like your Traditional IRA, your Roth IRA, and your employer plans, if you’re over the age of 50, you’re also eligible … I apologize, over the age of 55. See, the IRS makes things easy on me too.

If you’re over the age of 55, you can contribute an additional $1,000. So if an individual, that’s $5,400. If you’re on a family HSA plan, it’s $9,750. So again, a lot of nuance, a lot of details here that you should really be focusing on before the holidays turn, so these have your sole focus, and you’re making sure that you get the maximum tax benefit that you can from these nuanced amounts.

Earlier, Joe spoke about RMDs required minimum distributions. So now I’d like to spend a couple of minutes talking about the key dates of your required distribution. As I alluded to on the previous slide, changes with SECURE Act has made RMD planning more complicated for us as financial advisors and tax advisors. Again, the IRS loves to make things easy on us. I want to be clear. Not to confuse the required minimum distribution age with the qualified charitable distribution age of 70 and a half that Joe spoke about just a few minutes ago. Your required distribution age is entirely different. The required distribution age starting in just a few years ago, but is now effective, has been increased to age 73. In 2022, it was 72 years old. Again, the nuance here is that in 2033, so just a few years from now, the required distribution age is going to be raised to 75 years old.

Let’s look at the chart on the bottom half of the slide here, because again, the nuances are really important here. If you were born before 1950 or in 1950, your required distribution age is effectively age 72. If born between 1951 and 1959, your required distribution age is 73. If born in 1960 or later, your required distribution age is now effectively age 75. So these nuance does give us plenty of opportunity for planning areas that we’ll discuss here in a few moments, but it’s also critically important to be sure to take your required distribution before December 31st of every year that you have to take your required distribution. If you don’t, there is a penalty. Uncle Sam will come knocking. He wants his cut. You have to follow the rules. If you don’t take your required distribution in time, you are subject to a 25% penalty of your required distribution amount.

Just for some rough numbers here, for example, if your required distribution is $100,000 and you don’t take it in time for any reason, the IRS may take a $25,000, what we call an excise tax penalty. Ouch, $25,000. That one hurts. What we really like to focus on though is there are nuances here. If you don’t take it and if you try to correct it in a timely manner, the IRS has the option to reduce that penalty down to 10%. That’s out of the kindness of their heart. And so it’s really important that you work closely with your advisor and your tax accountant to be sure that you’re taking your required distribution before 12/31 of every year. The custodian who has custody of your retirement account should provide these figures to you very early in the tax year.

Looking forward a little bit and talking about a more broad strategy outside of the required distribution, let’s talk about how to manage some of those long-term required distributions. There’s a very common strategy that’s being used these days and it’s called a Roth conversion. This is typically best for clientele who are between those retirement years where they have yet to start their required distribution. The idea is that those are going to be low-income years because you’ve stepped away from your employment. You now have a reduced income. However, the Roth conversion comes with a lot of nuance and a lot of details that should certainly be discussed with your advisor and with your CPA. Before making the Roth conversion, you must identify your willingness to pay income taxes. Uncle Sam will come today or he will come tomorrow. And so once you have a full understanding of this, it’s important to identify what those lower income tax years will look like for you through your detailed financial plan.

Most of us have been contributing to a pre-tax 401(k) that we just spoke about a couple slides ago, your entire working career, and you’ve received an income tax deduction for those contributions to your 401(k) plan. That’s great because those are your high-earning years. When you retire and you no longer have that earned income, you might find yourself in a relatively low income tax bracket. Those make for great years and plenty of opportunity to convert over to your Roth IRA and pay income tax at a much lower income tax rate. This can also be true for individuals that might not have a lower income tax bracket in retirement, but could certainly benefit from Roth conversions, primarily because any monies contributed via a Roth conversion grow tax-free in the Roth IRA and what could potentially be a long period of time. So one of the main benefits, and really the last key point I’d like to make here is that not only is a Roth conversion a good idea for tax planning, it’s also something worth considering for your legacy.

It can be key and crucial to your estate plan. But again, before you decide to do a Roth conversion, we highly recommend you consult your CPA and financial advisor to see if a Roth conversion is the right fit for you to manage your long-term income tax rates. Let’s talk about what do you do if you make too much money to contribute to a Roth IRA, but it may be too early to do a Roth conversion and pay those income tax rates. There’s something that we like to talk about, which is what we call a backdoor Roth contribution. A backdoor Roth contribution is ideally designed for those who make too much money to contribute to a Roth IRA. You have too much earned income and you’ve been phased out of eligibility. There’s still a way for you to get money into that Roth IRA without the Roth conversion taxes. And again, that’s referred to as a backdoor Roth.

What we’ll focus on here is to contribute to a backdoor Roth, there’s a couple steps. It requires a little bit of legwork, admittedly, either from yourself or from your financial advisor. To contribute and do the backdoor Roth, what you’re going to do is make what’s called a non-deductible Traditional IRA contribution. That means the funds you put into your Traditional IRA will not be deducted from your taxes because your income has surpassed the threshold. But the key point here is that this is ideally best for those who have a $0 balance Traditional IRA. So practically speaking, if you have a Traditional IRA while you’re still working, there could be an argument to be made that you might want to move that Traditional IRA into your 401(k) plan.

That would now create a $0 balance Traditional IRA where you can make the backdoor Roth contribution. Logistically speaking, you make the deposit and then within the matter of a few days you take that deposit and you move it over into your Roth IRA. This is critically important that you have a $0 balance IRA because if you do carry a balance in your IRA, things become admittedly a little bit more complicated where we may be making that contribution on what we call a pro-rata basis.

That just makes the math a little bit more difficult. The benefit to doing the Roth IRA in way of a backdoor is that if you’re going to work for many, many years to come and you have a long time horizon before retirement, this may allow you to build significant Roth IRA balances before retirement and also without the Roth conversion taxes. Another nuance here is that you must have earned income. Just as if you were to contribute to a Traditional IRA or a Roth IRA, you must have wage or employment income. Looking forward a little bit here, I’m going to turn things over to Joe and we’re going to talk a little bit about estate planning and what to do with an inherited IRA and really what that means. So Joe, if you don’t mind, go ahead and take it away.

Joe Marmorato:

Thanks, Chase. So yes, want to talk a little bit about inherited IRAs, right. Chase was talking a lot about contributory, your own personal IRAs, but what happens when you inherit one from an individual? Well, the SECURE Act changed the required minimum distribution rules for most non-spousal beneficiaries, the qualified plans and IRAs, including Roth IRAs. So many times when a non-spouse beneficiary had inherited an IRA many years ago, they were eligible to distribute those required minimum distributions over their own life expectancy. But Congress came in recently and said, “Pump the brakes. Individuals who have stashed away all of this money into their retirement accounts are the individuals who should be using those funds for retirement.” These retirement accounts started to grow so large and individuals used them as an estate planning, legacy planning tool and vehicle that Congress came in and decided they did not want that to occur any longer.

So what they did was implemented this 10-year rule. So starting back in 2019 when the law passed there, individuals who have passed away after January 1st, 2020, those beneficiaries are subject to the 10-year rule. Now there are some exceptions. There are some individuals such as a spouse or minor children, or if you’re chronically ill, there are some exceptions there where you can still stretch distribution over your life expectancy, but a majority of non-spousal beneficiaries are going to be subject to this 10-year rule. So why is this so important? Well, for these large IRA balances that are inherited, that can mean a huge tax windfall here because you are now compressing the ability here to stretch those distributions over your lifetime into 10 short years. So it’s really important here to manage these IRAs accordingly and perhaps take out more than just those required minimum distributions to maximize favorable tax brackets.

So as the year comes to a close here, if you have an inherited IRA that has required minimum distributions, you may want to look into possibly distributing additional funds from it at a lower tax rate if you anticipate the account being liquidated in year 10 and being a significant tax burden for you at that point in time. So what happens when you leave an inherited IRA to a non-spouse beneficiary but you don’t want them to have all of that money right away? So what would be an example of this? Well, perhaps you have a grandparent who left their IRA to a grandchild. So let’s say the grandparent was age 80 and passed away and the grandchild is age 20. Well, the grandparent doesn’t want the 20-year-old to now have a million-dollar IRA that they can use as they wish. So that’s where a trust may be more appropriate for those individual beneficiaries. So when would you want to leave an IRA to a trust?

Well, again, the young beneficiary or if you’re in need of asset protection when there’s a substantial IRA balance and you have that desire for asset protection that might outweigh income tax costs. So there’s two trusts available to help manage these inherited IRAs. First, you have a conduit trust. Now, before I go into this, I will say these trusts are not necessarily as favorable as they used to be because of this 10-year window. Just because you created a trust to hold the IRA there, that doesn’t skirt around the 10-year window. You’re still subject to that, but I’ll talk about how that works with these two different types of trusts now. So a conduit trust. This basically says that all IRA withdrawals must be distributed directly to the trust beneficiary. So if that individual beneficiary is subject to required minimum distributions, and I want to highlight, not every beneficiary is going to be subject to RMDs. Many will be subject to that 10-year window though. You’re really only subject to RMDs if the original account owner themselves were subject to RMDs.

So for instance, if you set up this conduit trust and the 20-year-old is the beneficiary, well, those RMDs that they need to take out are going to be passed on to the 20-year-old beneficiary, but they can’t touch the rest of the account. But what happens is when those RMDs come out, they are taxed to the beneficiary at their income tax rate. But in year 10, those monies are still going to be paid out directly to that beneficiary and they will be paying taxes on it. So again, it could be a really large tax burden if a big windfall is going to come out in year 10. So that conduit trust can provide some asset protection for years one through nine, but come year 10, that beneficiary is getting all of those monies. Now that may be appropriate ’cause now they’re age 30, they’re more mature, and you would feel comfortable doing so. If you are not comfortable with that, that’s where you may want to look at an accumulation trust. That’s where IRA withdrawals may be accumulated in a further trust. So those RMDs are not necessarily passed out to the beneficiary.

All of those RMDs and the withdrawals are stuck in the trust, and depending on the trust terms, they can be distributed accordingly. Now, while that sounds favorable, it’s not necessarily favorable from a tax perspective, and the reason being tax rates for trusts are very compressed, okay. So single tax filers have graduated tax brackets. They range from 10% all the way up to 37%. And for single filers, that 37% rate kicks in around when your income’s around $600,000 or so. For trust, that 37% tax rate kicks in when your income’s around $16,000. So very, very compressed, meaning a lot of those IRA withdrawals are going to be taxed at that higher rate. So it may not be favorable at the end of the day keeping it in the trust, so it’s really important to speak with your financial advisor to come up with a good plan if you’re concerned about asset protection when it comes to leaving inherited IRA monies.

So going back on to estate planning, I just want to touch on a few other items outside of IRAs here that I think are important to address. So starting off, while I want to really focus on the tax perspectives of estate planning here in this presentation, I just want to have a little bit of housekeeping here as we’re coming to a close of the year, just a friendly reminder for individuals to revisit your estate plan if it has been a while. The laws have changed, your family situation has likely changed. It’s really important to ensure that you have updated power of attorney forms. Those, again, allow you to designate someone to manage finances, especially if you were to become incapacitated. Really double check those and ensure that the individuals named are appropriate and capable of doing so. Also, your trust and will, so it can help protect and distribute assets as you intend.

So if it’s been a while since you drafted a will, good time to revisit that to make sure that no new laws may impact that negatively. Also, long-term care insurance, review existing policies, consider purchasing a viable option. And finally, the advanced healthcare directive, that allows you to designate who will speak on your behalf for any medical decisions. So again, very important there, just revisit these. I like to have this as a friendly reminder. The final one that’s not on here are beneficiary designations, okay. Chase just talked a lot about your own IRAs and I talked about inherited IRAs. Make sure those beneficiary designations are appropriate for you and up to date because those will take precedent over your trust and wills there. So beneficiary designations, very important to check in on.

All right, so these were the federal state tax exemptions, okay. So individuals who had a estate that was valued over a certain amount were subject to federal state taxes. Now, these back starting here in 2011 was around $5 million or so, and then we had a big jump in 2018 upon the passing of the Tax Cuts and Jobs Act. Then that estate tax exemption was supposed to sunset and revert back to the 2017 levels. Well, last year in 2025, the One Big Beautiful Bill Act passed, and what that did was basically increased the federal estate exemption to $15 million per individual. So we no longer have to worry about these lower estate exemption amounts going forward. Each individual is going to be entitled to $15 million of an estate exemption. So for individuals who may have assets above that, it’s very important to speak with your financial advisor to see what potential strategies, maybe trust might be suitable and appropriate to help manage that because the federal estate tax rate is up to 40% and can really take away a lot of the assets that you intend to leave to your heirs there.

So this, as you can see OBBBA on the screen there, that was the One Big Beautiful Bill Act that again now is $15 million exemption per person that will be adjusted for inflation starting this year. So that is going to be the amount. We don’t have to worry about that sunsetting and reverting back to a lesser amount in the near future. Now, we were talking about federal estate tax, right. That can be a very big expense, but there’s a huge, huge exemption there. Well, there are some states out there. We have about 12 states that still have an estate tax of their own. So not only do you need to be concerned about the federal estate tax, you may need to be concerned about your state estate tax. Then you also have some jurisdictions that have an inheritance tax. That’s more so where the estate is not liable for the tax due, but the beneficiary themselves, the individual who inherited those assets may need to pay out some tax dollars upon inheriting those.

Right now we have five states with an inheritance tax, and then you’ll see that teal color, state has both. So we have the state of Maryland that has both an estate tax and inheritance tax. So it’s important here if you live in one of these states with one of these colors to come up with a good estate plan to really minimize any tax burden there for you. Now I’m going to pass it over to Chase to talk about how could we reduce some potential estate tax obligations for you.

Chase Hutter:

That’s right, Joe. Yeah, my friends across the Potomac River in Maryland, they’ve got a pretty punitive state when it comes to estate and inheritance tax. It’s the only state in the union that has both. It’s also worth considering what can we do now versus do later? How do we manage the size of our estate? When you gift now, you are essentially accelerating the inheritance. You’re moving assets from your estate and gifting it to whomever it may be, children, friends, or family. In doing so, as Joe alluded to earlier, you may be able to actually receive some tax advantages for doing this. When you pass away and your estate gifts funds away, you no longer receive that tax benefit. So for some folks, it may be beneficial to accelerate that gifting, whether to a charity or to an individual during your lifetime to take advantage of current tax law as your personal estate at the end of your life may not benefit.

I saw a question come over just a few minutes ago, and so this is a perfect transition to talk about how much can I actually give? There is a current annual exclusion amount set by the IRS, and in 2026, that amount is $19,000. This is important to note. If you’re going to take a note of anything, know, you can give $19,000 to anybody. If you kind of zoom out and think big picture, a married couple can do a double gift, if that makes sense, and if it’s of interest to you. So a married couple can give anyone $38,000 per year without having to notify the IRS. This is really one of the easiest transactions and most applicable to the average American, if you will. If you can look at the chart though, you can see that this annual exclusion amount has steadily increased from 2011 where it was a fixed $13,000 per year. That has increased to $19,000 per year for 2025 and 2026.

This dollar amount we do expect to continue to grow, but of course is subject to IRS decisions. Looking forward here, there’s a lot of information on this chart. This is not all encompassing of every kind of gift that you may want to give to a family or a friend. It’s just really a good sample of the most common gifts of assets that we see. Let’s start at the top in the first row with cash. Cash is the most straightforward. It’s the simplest. It’s what most of us give, whether to an individual, to family, or to charity. You write a check, you give literal cash, or perhaps you do an electronic funds transfer to the individual or charity of your choice. It is important though to track how much you are giving throughout a year if giving to an individual. Next, you could also give cash out of your IRA, or you could give cash rather to an individual to fund their IRA or Roth IRA.

This is the income limits that we spoke about just a few minutes ago that determine whether someone can contribute. So we’ll use a grandson, for example. Let’s assume he’s 17 years old and he’s got a summer job at the local ice cream stand. Perhaps he made $3,600 for 2026. That means you as grandparents can give him $3,600 for him to contribute to either a Traditional or Roth IRA. That $3,600 limit is the maximum he can contribute to an IRA because that’s based on his income. You could also give the additional and up to the $19,000 outside of what he may give into his IRAs. Next, let’s talk securities. This is the middle row, because you can also give shares of stock or mutual funds or ETFs, exchange traded funds, for example. It’s important to know that there’s a very big nuance here. It’s much different from giving cash to a loved one.

When you give to security, they inherit your cost basis. So for example, if you bought Apple stock, let’s say in the early 2000s, you might’ve paid even as low as a dollar per share for it. Now Apple stock trading nearly $200 a share. You gave that individual, let’s assume it’s your daughter for this example, $200 worth of stock. However, they inherit your cost basis of $1. That means if your daughter chooses to sell it, she’s potentially liable for a capital gain on the $199 per share of growth. Another nuance here worth noting, if she chooses not to sell it, she continues to defer that tax bill until the time at which she sells it. So you give her $200 per share worth of Apple. If she holds that in perpetuity, she effectively pays no taxes until she decides to sell. This is important to know because nobody likes a surprise tax bill.

Real estate also has the same treatment as if you were to give to security. That’s our fourth row here. If you were to give, let’s say, lands or a home to somebody, they inherit your cost basis and they’re inheriting that at current market values. If they were to turn around and sell it, they owe the capital gain on the difference of your cost basis and current market value. It’s treated much like a security would. Lastly, let’s talk about loans. This is the last row on our chart here. Loans are a very good option for our high-net-worth folks because it gives you the option to make a large gift to a family member. However, the nuance here is that you do need a formal loan agreement. This is a legal document that must be drafted, and you have to charge interest. The interest rate is not determined by the kindness of our heart or our friends that are connected, if you know what I mean, but the interest rate is actually determined by the IRS.

It’s what’s called the applicable federal rate, and it must be determined over a length of time outlined in the loan agreement. This must be done formally to make sure that it’s above board. Transitioning here to talk about next steps, we have admittedly covered a lot of grounds in a relatively short amount of time today, and we thank you for your time. We hope you found this to be a valuable use of your time, and ideally, Joe and I have provided you insights into the valuable conversations we enjoy having. At this time though, we’d like to stop sharing our screen because we have received some questions from individuals in our audience today. And so Joe, I’m going to turn it over to you to go ahead and answer the first question that we received, if that’s okay.

Joe Marmorato:

Sure. Thanks, Chase. So one question that came through here, “I recently inherited an IRA from my uncle. How do I know if I need to take a distribution before the end of the year?” So that’s a great question. So that’s where I’d highly recommend you speak with a financial advisor as it all depends. Depends on the type of IRA that you inherited. It depends on if your uncle was already subject to required minimum distributions himself. Generally speaking though, in the year that you inherited an IRA, you are required to satisfy that original account owner’s required minimum distribution yourself. Now, again, that is assuming they were subject to RMDs. So these rules have become very complicated, so it really depends, but ensure that you speak with a qualified professional there to determine if you need to satisfy a required minimum distribution before December 31st.

Chase Hutter:

Yeah, thank you, Joe, for that. I’ll handle the next question because someone asked, “Can I only give $19,000 to my family?” It’s a great question because you can give $19,000 to anybody. It could be a member of your church, friend, or family. It’s not just limited to your loved ones and immediate family. There is an additional nuance to that though. You can make a gift to a hospital to cover medical bills or to an educational institution such as a college to cover the education expenses. Those amounts actually do not impact your ability to give the $19,000 in addition. The nuance though is that they must be paid directly to a hospital or the educational institution. So for example, if you wanted to pay for the tuition or the hospital bill of a member at your church, for example, you could give $100,000 to the hospital or to the education institution and then give an additional $19,000 to that individual. So there’s some nuance here that exists, but in short, you can give to anybody you’d like.

Joe Marmorato:

Perfect. Thanks, Chase. We’ll have time for one more question here as we’re just at the top of the hour. Are there any limitations on the amount that you can give to charity and deduct in one year? Another great question, and unfortunately, no one direct answer. So there are some limitations depending on your income. Generally speaking, for cash contributions, you can only deduct up to 50 or 60% of your adjusted gross income. Any amount that’s disallowed may be carried forward to future years. You also have, when you contribute highly appreciated stock, if it’s long-term capital gain treatment, that may be eligible up to 30% of your adjusted gross income as a deduction.

You also have new limitations that came into play this year under the One Big Beautiful Bill Act that has a 0.5% adjusted gross income hurdle that you need to pass in order to deduct any charitable contributions. Again, these rules have become so complicated over time, so I highly suggest reaching out to your financial advisor to determine what would be the most appropriate method of giving for you and how to take advantage of it from a tax perspective.

Chase Hutter:

Absolutely. Great points, Joe. So if at any time throughout today’s conversation you’re looking for more information about Savant and what we do, I invite you to go to savantwealth.com for more information. On our website, you also have the option to schedule a complimentary 15-minute meeting at no obligation with someone from our team. We’d love to discuss any additional questions you may have one-on-one to discuss any individual needs that you may have.

Joe Marmorato:

Thank you all for attending today’s webinar. I hope you found this session to be informative. Have a nice day.

Speaker 1:

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