Why traditional retirement accounts have become the worst asset for estate planning

One way to avoid this is to pay out benefits long before they need to take advantage of the low tax rates, including the 22% and 24% tax rates, and the large tax brackets, Slott said.

For account owners who take only the minimum required distribution, Slott offered this: The tax bill doesn’t go away by taking the minimum; it could become even bigger.

“Minimums should not be the driving force behind tax planning,” he said. “Tax planning should drive distribution planning, not the minimum.”

The question account owners should ask themselves is: how much can you withdraw at low rates?

“Start now,” Slott added. “Start getting that money out.”

Slott also advised traditional IRA account owners to convert those accounts to Roth IRAs.

The account owner would pay taxes on the distribution from the traditional IRA, but once in the Roth IRA, the money would grow tax-free, the distributions would be tax-free, and there would be no required minimum distributions.

“Take that money to Roths with today’s low interest rates,” Slott said. “That’s how you beat this match. This way you make the tax rules to your advantage instead of to your disadvantage.”

Converting to a Roth IRA essentially places a bet on future tax rates, Slott explained. Most people think they will be in a lower bracket in retirement because they won’t have W-2 income.

But that’s actually the biggest myth in retirement planning, Slott said, and if you ignore this issue, the IRA will continue to grow like crazy and the tax bill will go against you.

“The advantage for the Roth is that you know what the current rates are,” he said. “You are in control. … You avoid the uncertainty of what future higher taxes will do.”

Slott also advised those saving for retirement to stop contributing to a traditional 401(k) and start contributing to a Roth 401(k).

Although employees who contribute to a Roth 401(k) will not reduce their current taxable income, Slott explained that this benefit is only a temporary deduction anyway. Contributions to a traditional 401(k) can be more accurately described as “an exclusion” from income, where your W-2 income is reduced by the amount you put into the 401(k).

Essentially, it’s “a loan you take from the government and have to pay off at the worst possible time during your retirement, not even knowing how high the interest rate could go,” Slott said. “So that’s a trap.”

Read more: 401(k) vs. IRA: The Differences and How to Choose Which One Is Best for You

Another way to reduce the tax trap that comes with being a traditional IRA account owner is to consider a qualified charitable distribution.

Individuals age 70.5 or older can donate up to $105,000 directly from a traditional IRA to qualified charities. This strategy helps donors avoid increasing their taxable income, which can keep them out of higher tax brackets.

“If you’re a charity, you can get money at 0% if you give it to charity,” Slott said. “That’s a great benefit. The only negative about it is that not enough people can take advantage of it. It’s only available to IRA owners who are 70.5 or older.”

Slott also noted that the income tax exemption for life insurance is the biggest benefit in the tax code and is not used nearly enough. And life insurance can help people achieve three financial goals: bigger inheritances for their beneficiaries, more control and less taxes.

“You can get to the ‘promised land’ with life insurance,” Slott said.

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