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DEATH AND TAXES are inevitable—and, as I keep getting reminded, also inextricably entwined.
I’m not so fortunate that I need worry about federal estate taxes. That privilege belongs to those who die with $13.61 million in 2024. But that doesn’t mean the taxman isn’t hovering over my demise, raising a host of lesser issues.
Paying the piper. Over the past few years, my focus has been on making big Roth conversions while staying within the 24% federal income-tax bracket. The goal: Build up my Roth and then bequeath it to my two children, while also shrinking my traditional IRA, so required minimum distributions in my 70s and beyond wouldn’t push me into a much higher income-tax bracket.
This year, I’m still aiming for the top of the 24% tax bracket—but I’m not planning any more Roth conversions. Instead, given my cancer diagnosis and likely short life expectancy, my new focus is on making gifts to my wife Elaine, my two children and my two grandchildren. Federal estate taxes may not be a worry, but Pennsylvania’s inheritance tax is. The latter isn’t an issue for Elaine, because spouses are exempt. But it’ll nick 4.5% out of any money I bequeath to my kids and grandkids.
The inheritance tax could also take a bite out of the money I give them now if I don’t live at least a year after making those gifts. That creates an incentive to give away money as soon as possible, and I’ve been doing just that. How much could I give? In the past, I’ve been guided by the gift-tax exclusion, which is $18,000 in 2024.
That’s the amount anybody can give another person each year without filing a gift-tax return. Anything above that sum gets deducted from the sum you can bequeath free of federal estate taxes, and would necessitate filing a gift-tax return. But given that I won’t be bequeathing anything close to the $13.61 million federal estate-tax exclusion, gifting more than $18,000 is no big deal.
The money I’m giving away is coming from a mix of my earned income and withdrawals from my traditional IRA. I have roughly 10% of my overall IRA—both Roth and traditional—in bonds, and I’m dipping into those bonds to make gifts. I may also sell some bonds to cover living costs if my earned income is less than I expect or if our travel expenses prove greater than I imagine. In my mental accounting, I’m free to use this bond-market money during my lifetime.
Passing it on. The other 90% of my overall IRA—again both Roth and traditional—is earmarked for Elaine and the kids, and that money is entirely in stocks. While my time horizon is now short, that of my beneficiaries hasn’t changed. Fingers crossed, they should have plenty of time to ride out any stock market downturn and notch handsome gains.
Elaine will be able to treat my IRA as her own and draw it down over her lifetime. Meanwhile, my two kids will be required to empty the IRA money they inherit over 10 years. Hannah and Henry will also owe Pennsylvania’s inheritance tax on the money.
All the money for Elaine is coming from my traditional IRA, while my two children will get my Roth accounts, plus a portion of my traditional IRA. Why earmark the entire Roth for Hannah and Henry? All their withdrawals will be tax-free. That means those withdrawals, when layered on top of their earned income, won’t push them into a higher tax bracket.
I briefly pondered withdrawing from my Roth and giving the money to the kids now. If I live a year after making those gifts, they’d avoid the Pennsylvania’s inheritance tax. But the fact is, even a modest amount of tax-free growth would pay for the inheritance tax, so it’s better to leave the Roth untouched and let the kids empty the account.
The IRS recently issued rules compelling some IRA beneficiaries to empty the accounts gradually over 10 years, but those rules won’t affect my kids. I’ve told Hannah and Henry they should delay tapping the Roth until near the end of the 10-year withdrawal period, so they squeeze the most out of the tax-free growth. Meanwhile, my kids should probably draw down the traditional IRA slowly over the 10 years, so they spread out the taxable income, plus they can use their withdrawal in the year after my death to pay Pennsylvania’s inheritance tax.
Do I now regret my earlier Roth conversions, and the big tax bills I paid as a result? Far from it. My best guess is that the tax arbitrage has worked in my family’s favor, meaning the tax rate I paid on my Roth conversions is less than what my children would now face if I hadn’t made those conversions, and they were instead looking at emptying a big traditional IRA.
Taxing matters. Readers might recall that, back in 2015, I wrote a mortgage to help my daughter purchase her current home. In July, I forgave the loan. That loan forgiveness is potentially subject to the state’s inheritance tax if I don’t live at least a year after making that gift. Still, I’m assured the forgiven loan won’t be considered taxable income for Hannah—something that could happen if, say, you’re drowning in credit-card debt and persuade your card company to forgive that debt.
That brings me to two other tax issues—one I’m no longer focused on, one that could be an issue. The new non-issue: the Medicare premium surcharge known as IRMAA, or income-related monthly adjustment amount. Before my cancer diagnosis, I’d planned to limit my taxable income starting in 2026, when I would turn age 63. Why? My IRMAA surcharges two years later, when I’m 65 and qualify for Medicare, would be based on that income. But now, it’s unlikely I’ll live that long.
Meanwhile, I’ve been assiduously tracking my medical expenses this year, thinking I’d be able to deduct them on Schedule A. But at $29,200, the standard deduction for a couple is sufficiently high in 2024 that I now suspect I won’t have enough itemized deductions, especially given that my health insurance has a $5,800 out-of-pocket maximum and given that these expenses are only deductible if they exceed 7.5% of adjusted gross income. Still, that relatively low out-of-pocket maximum is a godsend. I hate to think how much I’d be paying out of pocket if my cancer treatment was happening before the 2010 passage of the Affordable Care Act.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.
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Jonathan – As a fellow cancer patient, I feel like this article is speaking directly to me. My cancer was recently declared “dormant” as the meds continue to work, but I am aware that it is likely a matter of time until the disease figures out a way around them. I share your concerns as detailed above, and appreciate your candor in sharing your thoughts and insights. I honestly have nothing to add, other than you and your family are in my prayers. Stay strong, and Bless Up! All The Best, My Brother!
Thank you!
Hi Johnathan,
Thank you so much for the great articles. Much appreciated.
In building on a reader’s comment about “giving credit where credit is due”, In addition to the ACA “savings,” I’d like to suggest that you also credit the 2018 TCJA with saving you 4% on your taxes annually since the act was passed, in addition to the significant increase in the standard deductions.
All the best,
Bill
Jonathan, first off want to sincerely thank you for your kindness and grace in sharing your knowledge at this time in your life.
I want to comment on PA inheritance tax and bringing this to light for PA residents. Pennsylvania is not kind to single people in particular. My sister Eileen died of a brain aneurysm suddenly before Christmas in 2015; I was executor of her estate. In today’s parlance she was one of those wonderful
“Childless cat ladies”. Most of her assets were in her retirement IRA where
she designated her nephews and niece to be the beneficiaries. With the 15% PA inheritance tax due, the estate had a huge tax liability. I paid the inheritance tax within 90 days to mitigate the sting a bit for the beneficiaries.
Just wanted to emphasize for all PA residents that IRAs are subject to PA inheritance tax in addition to Federal Tax when they make withdrawals from their inherited IRA. This is particularly hard on younger beneficiaries.
Was wondering if you had any thoughts for single people in PA who want to do something nice for the significant people in their lives which would not have such a tax burden. Would leaving a life insurance policy to nieces/nephews be a better solution? Any thoughts for how single people in PA should think about designating beneficiaries in their IRAs. Thank you,
Bridgette D.
If folks give during their lifetime and live another year, the recipients would be spared the inheritance tax. If it makes financial sense, those with traditional IRAs might also convert to Roths. That wouldn’t help with the inheritance tax, but it would relieve beneficiaries of paying income taxes.
Per usual, more good thoughts Jonathan.
As a fellow “24%er” Roth converter, another thought for readers to consider….
Tax rates are likely going up big time in 2026, so there is likely one more year (2025) to take advantage, when doing Roth conversions, of what will look like low tax rates by 2026. Because of the reasons Jonathan provided, I find the Roth conversion approach an excellent tool for estate planning.
Not to further complicate things, but I’m of an age when IRMAA medicare payment adjustments are another variable for some readers to consider with the Roth conversion.
Appreciate your always objective and helpful thoughts Jonathan.
If your children are eligible to make Roth contributions, would it reduce the inheritance tax a small amount ($315) while preserving tax-free growth if you gifted each of them $7,000/year from your Roth that they would use for their Roth contributions?
Potentially — but I have to live a year after making any gifts, or the inheritance tax still applies.
Jonathan, thanks for an excellent article, and a number of useful links. We ran into a number of these PA specific issues when my wife’s aunt passed away. She was widowed and had no children – my wife and her 4 siblings were her heirs. They were subject to the 15% inheritance tax. We did the 5% by filing the state tax return what the 90 day window.
To clarify, Pa requires the tax return to be filed within 9 months. A saving of 5% if you pay the tax within 90 days and can be done in advance of the filing. Just make sure you keep records of payment as the state can be slow in sending a receipt which you would use with the return.
Thanks for the continuing clear headed advice you are giving us readers despite your current health status. It is sincerely appreciated.
I’d like to give credit or credit is due. So, I’m curious how the ACA helps? Did it limit deductibles to $5800?
For a health-care policy to comply with the ACA, there’s a limit on its out-of-pocket maximum:
https://www.healthcare.gov/glossary/out-of-pocket-maximum-limit/
Thanks for the insightful comments on organizing your estate. They are helpful since I am 78 and closer to the end than the beginning having recently suffered a heart attack. I’ve always pictured “the game” to have two phases – The accumulation phase and the distribution phase – but you have brought to my attention that there is another phase and that is the most efficient manner to pass along your estate. Thanks for sharing your thought process and reasoning so I can smooth the path for my spouse and daughters after my demise..
Sorry to hear about the heart attack! I hope the recovery isn’t too rough.
Thanks, Jonathan, and all the commenters so far. As a fairly recent PA resident, all the PA-specific info and hyperlinks are extremely helpful as I organize my estate to make it as easy as possible for my heirs. Appreciate your brave and pragmatic approach, Jonathan. It’s always good to spend part of Saturday with you.
This is a quick thought, to which I haven’t given analysis, but, the forgiven mortgage to your daughter has several income and gift tax considerations. IRC 108 addresses COD, Cancellation of Debt income, which creates taxable ordinary income to the debtor; could consider to be a gift, which would require a gift tax return. Also, the IRS scrutinizes “Related Party Transactions,” IRC 267. There are also rules about below market interest rate loans between related parties; the IRS scrutinizes related party transactions for potential tax evasion. As I said, I did not read the statutes, related regs and other substantial authority. I’ve been “out of the game” since I retired 5 years ago. Just thoughts and concerns off the top of my head.
I addressed the gift-tax return and cancellation-of-debt tax issue in the article. The interest on the loan was not below market.
Pennsylvania dies not tax retirement
income (pensions, 401 k’s etc) and it makes
up for that through the use of an inheritance
tax.
But the rate structure of the inheritance tax
has always seemed questionable to me.
it jumps from 4.5 Pct for children to
12Pct for siblings and 15 Pct for nieces,
nephews and all other inheritors.
Is it really appropriate fir the state to
impose differential tax rates in this manner ?
People have many reasons they may wish
to leave assets to inheritors other than their
children, or they may simply not have
children. Rate structure of this type does
not seem reasonable to me.
This is exactly why PA is out of the running for our retirement destination. We always hope states use rational reasons for the formulas they use to achieve a budget, so this may make sense for PA based on the low number of people who would be affected by this structure.
The state of PA has a informational FAQ fact sheet regarding the PA inheritance tax and lock boxes.
https://www.revenue.pa.gov/FormsandPublications/FormsforIndividuals/InheritanceTax/Documents/rev-584.pdf
After reading the publication there are a couple of takeaways you may want to consider-
PA law limits who may enter a safe deposit box after the death of a decedent. Consideration may be desired to close any safe deposit box in your name, if any, prior to your death to eliminate that hassle to your personal representative.
If payment of the PA inheritance tax is made within three months of the date of death, a 5 percent discount of the tax paid or the tax due, whichever is less, applies. Taking the discount seems like a win for your heirs.
Looks like the personal representative is the person required to file the PA inheritance return but the FAQ is unclear to me where the source of the funds to pay the tax will come from. It may be good for you to clarify if you want those funds should come from your remainder estate or from the specific bequest of your Roth assets to eliminate that question between your loved ones.
Your planning and actions are a great gift to your family and an example of the thinking for all of us on how to best approach our own mortality.
Best, Bill
Thanks for the comment. I don’t have a safe-deposit box. Perhaps you’re thinking of this Forum thread:
https://humbledollar.com/forum/do-you-own-a-safe/
Jonathan, your strength and positive attitude continue to amaze me in light of your fate. Thank you for your thoughts, insights and sharing your planing at, I’m sure, a difficult time that many of use will not experience.
As you prepare your estate, rather than willing a portion of your Roth IRAs to your grandchildren, have you considered super funding a 529 Plan for them (if you haven’t done this already)? The overfunding could not only fund their education needs (and possibly start their Roth IRAs), leftover funds could finance the education of future generations. Your education legacy. I’m currently exploring Dynasty 529 Plans and Trusts as a possibility for my 3 grandsons.
As a token legacy, since my grandsons live in Maine, it is cheap to purchase a lifetime fishing (or hunting or trapping) license if purchased before age 5. 60 years from now when my grandson is fishing with his grandchild, I hope he’ll fondly remember, ‘my grandpa bought me my fishing license and I bought yours’.
I’m not only working on memories with them, I’m also working on legacies (some of them rather quaint).
All the best to you and your family. You’ll remain in our thoughts and prayers.
We have superfunded, but it’s key to remember that states have limits on the amount that can be held in each 529 (generally $300ish – $600ish). Of course a student can be beneficiary of different 529s and one can transfer funds to another recipient if a fund becomes overloaded.
https://www.nerdwallet.com/article/investing/529-contribution-limits
Also, if one superfunds but dies before the 5 years have been reached, there are tax implications for the estate.
Thanks for your comment. My Roth is going to my children, not my grandchildren. Meanwhile, separately, I have been funding 529s for my two grandsons.
minimizing your tax bill is correct on many accounts, why pay more than necessary, than others, but the flip is in our society taxes are the ‘commons’…the best steak, the best vacation, the nice cars that are reliable are all worth it.
the united states is simply worth it…actually worth more as our freedom and civil rights are along with a strong military to back us all up a bargain!
do not begrudge the piper his due..the music is sweet and uplifting and continuing a nation’s debt while delaying the piper’s bill will cost your descendants plenty in the long run.
debt is either defaulted, paid or inflated to irrelevance…our legacy to our children is to hand them a community and a planet as good as was gifted to us..taxes are part of the trees…remember the forest.
contribute. that’s why the sting of taxation is ameliorated by the possibilities of a better commons…
Yet corporations and super wealthy pay a much smaller % of their income than the average person. Yes, I know they pay a lot, dollar wise, but they also get to keep a much higher percentage than the rest of us.This contributes mightily to the country’s debt. They should pay their fair share
I would add a healthy and well-educated citizenry to the commons.
Jonathan, you said “my kids should probably draw down the traditional IRA slowly over the 10 years, so they spread out the taxable income.” Didn’t the IRS recently rule that all TIRA beneficiaries (except spouse) must take yearly RMDs for years one through ten?
James
The rules don’t apply to all non-spouse beneficiaries. In the article above, I included a hyperlink to this piece, which offers a good explanation of the rules:
https://www.kiplinger.com/taxes/irs-10-year-rule-for-inherited-iras-kiplinger-tax-letter
The famous quote from Ben Franklin,”Nothing is certain except taxes and death.” Knowing this is one thing, but preparing for it brings you peace of mind!
All very helpful, clarified information. Like the fog of war, the fog of taxes changes everything at the end of our lives. Even more succinctly “everybody has a plan until they get punched in the face.” Thank you, Max