Strategies for Navigating Double Taxed Retirement


SINCE THE PANDEMIC BEGAN, clients and advisors alike are taking extra precautions when planning for the future. This often entails exploring the benefits of plans such as long-term care, disability or life insurance. One future-facing aspect of a client’s financial plan is most likely a retirement fund. Yet, what happens to this fund if the client were to suddenly pass? How much of that fund will actually make its way into the pockets of their loved ones?

Retirement funds have the potential to be taxed in two ways as the plan is being disbursed: income and estate tax. However, many clients aren’t aware of the amount of their disbursement that goes toward taxes and may inadvertently end up leaving their beneficiaries less than originally planned.

By tapping into some savvy strategies, you can aid in creating a holistic financial plan that accounts for this taxation. This will ensure your clients are better able to distribute the intended amount to their beneficiaries, in the wake of the unexpected.

To ensure your clients get the most for their loved ones after they have passed, I recommend starting with a basic policy review and audit. It’s important to understand what life insurance policies, retirement plans and other assets a client may have in their portfolio to determine the best approach.

First, identify any assets that are taxable, identifying the client’s entire estate. This could be trusts, cash, annuities, real estate, stocks and more. During this step, I also review the client’s retirement accounts, and their distributions. When looking at their distributions, you should be looking at two things specifically:

1. Income Tax: When funding their retirement plan, a client does not pay taxes as they are paying into the fund. Instead, the taxes are deferred to when the funds are distributed. This works similarly to when paying income tax on a regular paycheck, but instead is taken out of each retirement distribution.

2. Estate Tax: In the event of your client’s passing, estate tax can be applied to assets handed down to their heirs if they are over the state and federal estate tax thresholds. Because estate tax is percentage based, it is important to have a full understanding of your client’s assets and what is taxable. This is affected by assets such as the property they own, stocks, cash, or other non-liquid assets that can be passed down to heirs. If the client has built a strong retirement fund and worked to gather a large estate, this tax could be a large percent of their retirement fund and reduce the amount their heirs receive.

If your client qualifies for an estate tax on top of the income tax, they will see a significantly lower payout of their retirement income. In some cases, this may take away up to 60% of what was originally paid into the plan. For example, what may initially look like a one-million-dollar retirement fund payout could actually only be $400,000 after estate and income taxes are applied. How can clients ensure that their loved ones are taken care of after they are gone?

Be transparent with your clients that double taxation is likely to occur, especially if they are high net worth individuals. Then, suggest strategies to help ease their worries of their loved ones being left financially insecure. One way to offset this double taxation is with an often-overlooked solution: life insurance.

When life insurance is paid out to the beneficiaries, it is done so income tax free, and if structured properly estate tax free. By incorporating a life insurance plan alongside the retirement plan, clients can pass the entirety of their policy onto their heirs without the heavy taxation that comes with a retirement fund. In today’s economic climate, clients are seeking financial security for themselves and their loved ones more than ever and investing in a life insurance plan is a great strategy to achieve that.

When working with a client to navigate retirement planning, it’s imperative to connect with the rest of their financial team, such as their insurance professional, investment advisor, estate planning lawyer, and CPA to align on your client’s goals and objectives. Without this cohesion, you may miss out on an opportunity to streamline your client’s financial plan and provide them the best possible guidance. Connecting with other like-minded professionals within your community such as those involved in your local Estate Planning Council will also help you ensure you’re providing your clients the most updated advice when it comes to taxation laws.

Utilizing these strategies can ensure that your client is prepared for what may come. No matter what phase of life they are in, tapping into life insurance while planning for retirement helps provide your client assurance that, in the future, their loved ones will be financially sound.


DAVID E. APPEL, CLU, ChFC, AEP® is the Managing Partner of Appel Insurance Advisors in Newton, MA, and a 25 + year Million Dollar Round Table (MDRT) member. David has been in the life insurance industry since 1992 and specializes in what his boutique firm has trademarked People Insurance™, life, health, disability, and long-term care insurance, for personal as well as corporate clients.