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Retirement planning isn’t complete without factoring in the people most important to you. A crucial component of your legacy strategy involves your investments and how they’re structured.
Many people fail to review their investment accounts or the future tax impact. That lack of oversight can be damaging to your beneficiaries.
The investments you make in your 50s and 60s can positively or negatively impact your estate and your beneficiaries’ future taxes, depending on your approach.
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Strategic decisions regarding asset location and account types — taxable, tax-deferred, and tax-free — can help preserve more wealth for your loved ones and minimize estate, capital gains, and income taxes.
Here are the tax impacts of different retirement account types:
Traditional retirement accounts. Contributions to 401(k)s and IRAs are pretax, and the money grows tax-deferred. Beneficiaries must pay ordinary income tax on withdrawals.
Under the SECURE Act, most beneficiaries other than your spouse must withdraw all assets within a 10-year period, potentially pushing them into higher tax brackets.
Roth IRAs. Contributions to Roth IRAs are made with after-tax dollars, but qualified withdrawals are entirely tax-free (as long as you are age 59 ½ and have held the account for five years).
Roth IRAs can be an excellent vehicle for legacy planning because beneficiaries receive tax-free distributions (also generally subject to the 10-year withdrawal rule) and also because Roth IRAs are not subject to required minimum distributions.
Taxable brokerage accounts and real estate. These assets generally receive a step-up in cost basis, a tax provision in which the original cost of an inherited asset is adjusted (or “stepped up”) to its fair market value on the date of the original owner’s death. This adjustment significantly reduces or can even eliminate the capital gains tax that the beneficiary would owe if they sell the asset later.
Life insurance. Proceeds from life insurance policies are generally not subject to income tax for the beneficiary and can provide immediate liquidity to the estate to cover any potential estate tax bills, avoiding forced sales of less liquid assets like real estate.
Investment and planning strategies for your 50s and 60s
A common mistake people make is not adjusting their asset allocations as they approach retirement. If you have a substantial amount of money in your qualified accounts, for example, that allows you to be a little more aggressive from an investment perspective in your non-qualified accounts.
The most overlooked part of the legacy planning process involves RMDs. Some people have the preconceived notion that the only money they’re going to withdraw from their 401(k)s and IRAs is for the RMDs —- the amount the government requires you to withdraw from those accounts each year, usually starting at age 73.
Proactively managing those accounts ahead of the RMDs can give you more financial growth and flexibility while putting your beneficiaries in a better tax position once they start receiving the funds.
If you have a significant amount of money in tax-deferred accounts and don’t need the income on a yearly basis, the RMD is just an extra tax to pay.
Here are some strategies to consider:
Asset location. Place high-growth investments that generate significant capital gains in taxable accounts to leverage the step-up in basis at death.
Another option is to place investments that generate ordinary income (such as bonds or some dividend stocks) in tax-deferred or tax-free accounts.
Roth conversions. Consider converting a traditional IRA to a Roth IRA when you are in your 50s or early 60s, particularly in years when you are in a lower tax bracket (e.g., if you’re no longer working full-time but have not yet started Social Security or pension income). You pay the income tax on the conversions, but the entire account grows and is distributed tax-free to beneficiaries.
Strategic gifting. Use the annual gift tax exclusion (currently $19,000 per recipient per year as of 2025) to transfer assets out of your taxable estate during your lifetime.
Review and adapt. Tax laws and personal circumstances change. Routinely review your estate plan with an estate planning attorney and financial adviser to help ensure it remains tax-efficient and aligns with current laws and your evolving goals.
Ultimately, aligning your investment strategies with long-term legacy goals requires careful consideration and professional advice. Your decisions can impact your legacy and estate by determining wealth growth and preservation and minimizing tax burdens for beneficiaries.
When strategic investment decisions are integrated with a comprehensive estate plan, you can be assured of a smooth transfer of assets across generations.
Dan Dunkin contributed to this article.
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