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Consider Investing Your Excess Retirement Funds Like Your Heirs Would

Christopher P. Allegretti


A financial plan has a beginning, but no end. As a retiree your plan is designed to accommodate your needs and goals through your retirement. But it should also consider the assets you will leave behind—for your children, grandchildren, charitable organizations, however you intend your assets to be distributed and your legacy fulfilled. And because your financial plan is more than merely about you, the investments in your portfolio should mirror the same concerns. If you’re leaving money to a next generation, for example, you might invest that money as if it was already in their hands.

That kind of financial planning is influenced by two tax rules, one of which emerged recently with the passage of the SECURE Act of 2019:

  1. Step-up in cost basis. When non-retirement assets—stocks, bonds, mutual funds, a house, an antique collection—are inherited, the beneficiary receives a “step-up” in cost basis. A stepped up basis increases the value of the asset for tax purposes to the market value at the time of the death of the original owner. For example, over time an individual invests $50,00o in a stock portfolio. At their death, the portfolio, which is left to their child, is worth $100,000. The child can draw down the funds, up to the full amount inherited of $100,000, tax-free.
  2. SECURE ACT and inherited retirement plans. Inheritors of retirement accounts, like IRAs or 401(k) accounts, do not receive a stepped up basis. Before the SECURE Act, inheritors of those accounts could minimize taxes on withdrawals by stretching out withdrawals over their life expectancies. Now, beneficiaries of account owners who pass away after January 1, 2020—exceptions include a spouse, a minor child, and a disabled individual—must withdraw assets in an inherited IRA or 401(k) within 10 years.

These rules drive retirement planning in a couple of ways. Parents might draw down on their taxable retirement accounts first, in particular if their tax rates are lower than their children who are likely in their highest income-producing years. If they don’t need the money, they could still cash out the assets, pay the taxes, and put the money in accounts that grow tax-free. Moreover, they could rebalance their portfolios to reflect the risk tolerance of those who will inherit the money. The portfolio grows at a more aggressive rate, and the children inherit the money on a step-up cost basis.

Every individual is different and rebalancing to reflect your heirs’ risk profiles is one of many planning options to consider. But it is an important discussion to have with your financial advisor, in particular for parents whose children are successful in their careers and earning at rates that put them in higher tax brackets. Investing like your heirs could make a substantial difference in the inheritance they ultimately receive.


The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.

Parents With Adult Children Sitting On Steps in Front Of House

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