Retirement, estate, and advanced planning

Retirement plan strategies

The basic choice in IRA saving is when to pay the tax. A traditional IRA may give a deduction now and taxes withdrawals later; a Roth IRA gives no deduction now, and qualified withdrawals are tax-free. For 2025 a taxpayer can contribute up to $7,000 ($8,000 if age 50 or older by year-end) to all traditional and Roth IRAs combined, but not more than taxable compensation. Workplace defined contribution plans, such as 401(k) plans, have their own, much higher limit: for 2025 the annual additions to a participant’s account (elective deferrals, employer contributions, after-tax employee contributions, and forfeitures, not counting catch-up contributions) can’t exceed the lesser of 100% of the participant’s compensation or $70,000.

2025 modified AGI phase-out ranges. Within a range the deduction or contribution is reduced; above it, none is allowed.

• Traditional IRA deduction, taxpayer covered by a workplace plan: $79,000–$89,000 single or head of household; $126,000–$146,000 married filing jointly; $0–$10,000 married filing separately.
• Traditional IRA deduction, taxpayer not covered but spouse is: $236,000–$246,000 married filing jointly.
• Roth IRA contribution: $150,000–$165,000 single, head of household, or married filing separately and lived apart all year; $236,000–$246,000 married filing jointly; $0–$10,000 married filing separately and lived with the spouse at any time during the year.

Filing separately is a planning trap: a taxpayer who files separately and lived with the spouse at any time during the year loses the entire traditional IRA deduction (if covered by a workplace plan) and the entire Roth contribution once modified AGI reaches $10,000.

A taxpayer above the deduction range can still make a nondeductible traditional IRA contribution. Qualified Roth distributions and the five-year rule are covered in Social security benefits and retirement income. For further reading, see IRS Publication 590-A and Publication 590-B.

Rollovers and transfers

You can preserve the tax-deferred status of your retirement assets without paying current taxes or early withdrawal penalties at the time of transfer. Taxpayers have 60 days to roll over a retirement from one account to another. Source: Rollovers of retirement plan and IRA distributions - Internal Revenue Service

Minimum retirement distributions (RMD). Required minimum distributions from a traditional IRA begin for the year the owner turns 73. The first RMD may be delayed until April 1 of the year after the year the owner turns 73; every later RMD is due by December 31 of its year. An owner of more than one traditional IRA figures a separate RMD for each IRA but can total these amounts and take the total from any one or more of the IRAs. For more details, see the RMD comparison chart (IRAs vs. defined contribution plans) on the IRS website.

Definitions

Required minimum distribution (RMD)

The minimum amount that must be withdrawn annually from tax-deferred retirement accounts (such as traditional IRAs and 401(k)s) once the account holder reaches age 73. Failure to take the RMD results in a 25% excise tax on the amount not withdrawn, reduced to 10% if the shortfall is corrected within the correction window.

Rollover

The tax-free transfer of funds from one retirement account to another. A direct rollover moves funds directly between institutions; an indirect rollover requires the account holder to deposit the funds into the new account within 60 days to avoid taxes and penalties.

Inherited IRAs

An Inherited IRA, or a Beneficiary IRA, is an account that is opened when someone inherits an IRA or employer-sponsored retirement account after the original owner’s death. Beneficiaries are not allowed to make additional contributions. Still, the funds can remain tax deferred, and money can generally be withdrawn right away without penalty. However, a designated beneficiary is generally required to liquidate the account by the end of the 10th year following the year of death of the IRA owner. Eligible designated beneficiaries are excepted and can take distributions over their life expectancy: a surviving spouse, the owner’s minor child (until age 21), a disabled or chronically ill individual, and anyone not more than 10 years younger than the owner.

Trustee IRAs

An individual retirement account is defined under Internal Revenue Code Section 408 as a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries. The trustee of the IRA is the custodian of the IRA assets. A trustee may be a bank, credit union, financial institution, or trust company that is responsible for the IRA administration.

Timing income and deductions

Most individuals use the cash method: they report income in the year they actually or constructively receive it and deduct expenses in the year they pay them. Moving a payment across December 31 moves the income or deduction to the other year, which lowers tax when the taxpayer’s rate, or ability to use a deduction, differs between the years.

• Deferring income and accelerating deductions. A taxpayer who expects the same or a lower rate next year can push income into January (delaying year-end billing or the sale of an appreciated asset) and pull deductions into December (paying the January state estimated tax installment, or next year’s charitable gift, early). Income already credited to the taxpayer’s account or set aside for them is constructively received, so deferral has to come before that. When next year’s rate will be higher, the reverse lowers tax.
• Bunching itemized deductions. Each year the taxpayer deducts the larger of the standard deduction or itemized deductions; for 2025 the standard deduction is $15,750 (single or married filing separately), $31,500 (married filing jointly), or $23,625 (head of household). A taxpayer whose itemized deductions fall a little short can concentrate deductible payments they control into one year to itemize, then take the standard deduction the next.
• Harvesting capital losses. Selling investments that have lost value before year-end realizes losses that offset capital gains; up to $3,000 ($1,500 if married filing separately) of net loss offsets other income, and the rest carries forward. Buying substantially identical securities within 30 days before or after the sale makes it a wash sale, and the loss is disallowed (Sales, losses, and special capital asset rules).
• Getting under a phase-out. A traditional IRA contribution for 2025 can be made until April 15, 2026, and, if deductible, still lowers 2025 AGI, which can bring the taxpayer under the income limit for a credit or deduction.

Example: Bunching charitable gifts

Dana is single. Each year she pays $10,000 of state taxes and mortgage interest and gives $5,000 to her church. Her $15,000 of itemized deductions is less than the $15,750 standard deduction, so her gifts bring no tax benefit. In December 2025 she gives both her 2025 gift and the gift she had planned for 2026.

Answer: Her 2025 itemized deductions are $20,000 ($10,000 + $10,000), $4,250 more than the standard deduction she would otherwise take. In 2026 she takes the standard deduction.

Estate planning, gifts, trusts, and charitable giving

Estate planning refers to dispersing one’s property and assets upon one’s death. Settling an estate involves drafting legally enforceable documents such as wills, trusts, and advance health care directives. Estate planning fees, such as investment advice, accounting, tax preparation, drafting of wills, and powers of attorney, are generally not tax-deductible due to the changes introduced by the Tax Cuts and Jobs Act of 2017.

Charitable giving

Gifts to qualified charitable organizations are deductible by a taxpayer who itemizes, up to a percentage of AGI (60% for cash gifts to public charities), and any excess carries forward for up to 5 years. Donations of property or appreciated assets may also allow donors to avoid capital gains taxes. Appreciated property held more than one year is generally deductible at fair market value, but property that would produce ordinary income or short-term gain if sold (held one year or less, or inventory) is generally deductible only up to its basis. An IRA owner age 70½ or older can make a qualified charitable distribution (QCD): up to $108,000 for 2025, paid directly from the IRA to a charity. A QCD is excluded from income rather than deducted, so it helps a taxpayer who takes the standard deduction, and it counts toward that year’s required minimum distribution. The charity is qualified under IRS rules for tax deductibility. Review the Instructions for Form 8283 (12/2024) for more information.

Gifts

Per IRC §102, a gift is a voluntary transfer of cash or property to family or friends. Gifts are not tax-deductible to the donor nor taxable income to the recipient. A donor whose gifts to one person in a year exceed the annual exclusion reports them on Form 709, but gift tax is due only after the donor’s lifetime exclusion is used up. For 2025, the gift tax exclusion has been set at $19,000 per person per year for an individual filer. A taxpayer can give up to $13.99 million (the 2025 lifetime basic exclusion amount) tax-free to those who are the fortunate recipients of his or her generosity. More details are covered in the gift tax and estate tax lessons. A charitable remainder trust (CRT) may be useful if you have a concentrated stock position that you want to diversify while benefiting a charity. When the CRT sells appreciated stock contributed to it, the trust itself owes no capital gains tax on the sale; the gain is taxed to the income beneficiaries as it is carried out in their payments. Then the proceeds from the sale can be reinvested in a diversified portfolio within the trust. Income that is generated by that portfolio is distributed by the trust and is taxable to a taxpayer or a taxpayer’s family member.

Definitions

Gift tax

A federal tax imposed on the transfer of property from one individual to another without receiving full value in return. Gifts above the annual exclusion must be reported on Form 709 and count against the lifetime exemption.

Charitable remainder trust (CRT)

An irrevocable trust that provides income to the donor or named beneficiaries for a set period, after which the remaining assets pass to a designated charity. Contributions of appreciated assets are generally exempt from immediate capital gains taxes, and the donor may receive a partial charitable deduction.

Divorce settlement, common-law, and community property

Certain aspects of a divorce settlement may have tax implications:

• Property transfers: Transfers of property between spouses as part of a divorce are generally non-taxable.
• Retirement accounts: Transfers of employer retirement plan accounts require a Qualified Domestic Relations Order (QDRO) to avoid tax and the 10% additional tax; an IRA moves tax-free under the divorce or separation decree, without a QDRO.

Form 8332: Release/revocation of release of claim to exemption for child is necessary if the non-custodial parent wants to claim the child as a dependent for tax benefits and must be signed by the custodial parent and attached to the non-custodial parent’s tax return. While still married, the married filing separately filing status can protect one spouse from being liable for the other spouse’s tax obligations, allowing for clear separation of finances, which can simplify financial planning post-divorce. Certain tax credits and deductions are reduced or unavailable when filing separately, and the married filing separately brackets reach the top 37% rate sooner ($375,800 of taxable income for 2025, versus $626,350 for single filers).

Definitions

QDRO (Qualified domestic relations order)

A court order that recognizes a spouse’s, former spouse’s, child’s, or other dependent’s right to receive a share of a retirement plan participant’s benefits. A QDRO allows retirement assets to be transferred incident to divorce without triggering taxes or early withdrawal penalties.

Common-law marriage

If a common law marriage is recognized by the state where you now live or the state where it began, the couple is married for federal tax purposes and can file their tax return as “married filing jointly” or “married filing separately.” However, tax rules vary by state; not all common law marriages are recognized for federal tax purposes.

Community property

Also known as “marital property,” nine states in the United States observe community property laws. These states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In states that have community property laws, all assets and debts acquired during the marriage are considered community property and are equally owned by both spouses, regardless of whether one or both spouse’s name is on the item. If the couple divorces, each spouse is entitled to half of the community assets and debts. While a prenuptial agreement can alter how assets are classified, the default rule in a community property state is that wages earned during the marriage are community property unless a valid agreement stipulates otherwise. The type of bank account used does not determine the classification of wages as community property. The classification is based on state law. Property owned by either spouse before the marriage or after the legal separation may not be considered or divided as community property. Business interests and pensions, like 401(k) plans, also fall under community property. Spouses should understand the difference between marital property and non-marital (separate) property.

Definitions

Community property

A marital property system used in nine U.S. states in which most assets and debts acquired during a marriage are considered jointly owned by both spouses, regardless of whose name is on the account or title. Each spouse owns an equal half-interest in community property.

Separate property

Assets or debts owned by one spouse individually, typically acquired before the marriage or received as a gift or inheritance during the marriage. Separate property is generally not subject to division upon divorce in community property states.