Are You Leaving Your Beneficiaries A Tax Time Bomb?

Updated on May 27, 2017
Brett Sause CEO of Atlantic Financial Group
Brett Sause

When it comes to retirement – and to passing on whatever wealth you’ve accumulated to a spouse or the next generation – you may think you’ve thought of everything.

But despite your careful planning, it could be that Uncle Sam will be handing you a hefty tax bill while you’re living – or your beneficiaries one when you die.

“Even people who have been great about saving for retirement don’t always realize the tax implications of what they’ve done,” says Brett Sause, CEO of Atlantic Financial Group LLC ( “They may have created a significant tax problem for themselves, and they could be leaving behind a tax time bomb for their beneficiaries.”

The scenario is a fairly common one, especially for baby boomers in or near their retirement years.

“Someone told you to get an IRA,” Sause says. “Or they told you to open a 401(k) because your employer was offering it as a benefit, and it sounded like a good idea.”

And those are good ideas – to a degree, he says. An IRA, a 401(k) or a 403(b) helps slice into your income tax bill today, putting more in your pocket now and less in the government’s. But these are tax-deferred plans, not tax free.

Eventually, the tax bill comes due. When you retire, any withdrawals from those accounts are taxed. And when you turn 70½, the federal government requires you to withdraw a minimum amount, whether you want to or not.

“People often assume their tax rate is going to be less when they retire, but that’s not necessarily the case,” Sause says.

He says those who want to avoid that tax time bomb for themselves – and in some cases for their beneficiaries – could consider other ways to invest their dollars, such as:

  • Municipal bonds. Municipal bonds are used to fund schools, highways or other government projects. Under the federal tax code, the interest income on municipal bonds is tax free. Usually, the interest also is exempt from state taxes.
  • Roth IRA. Unlike a traditional IRA, you don’t get to defer taxes on the income you contribute to a Roth IRA. But the upside is that when you reach retirement age, you can generally make withdrawals income tax free. And if you die with money still in the account, your beneficiaries also won’t pay taxes when they make withdrawals (but could still be subject to estate taxes).
  • Life insurance. Life insurance death benefits pass to beneficiaries income tax free, and it provides other advantages as well. “You can use permanent life insurance while you’re still breathing,” Sause says. For example, you can withdraw money from it and you can borrow from it*. People tend to see the life insurance premium they pay as another bill, he says, not unlike the cable TV or electric bills. Instead, Sause says, it could be seen as a contribution, much like the contribution to an IRA or a 401(k), because in addition to the death benefit protection, permanent life insurance has living benefits too.

“It’s always hard to do someone’s planning based on what the future holds,” Sause says. “But with our national debt what it is, it’s likely tax rates are going to be higher years from now. So with retirement planning, it often becomes a matter of whether you want to pay your taxes now or pay them later.”

About Brett Sause

Brett Sause, an 18-year veteran of the financial services profession, is CEO of the Atlantic Financial Group LLC ( Brett has been awarded both the National Quality Award and the National Sales Achievement Award from NAIFA. Brett has been featured in numerous financial publications, such as Life Insurance Selling Magazine and Advisor Magazine and has been the keynote speaker at many insurance and financial practices around the east coast.

* The cash value in a life insurance policy is accessed through withdrawals and policy loans, which accrue interest at the current rate.  Loans and withdrawals will decrease the cash surrender value and death benefit.

Brett M. Sause, Principal, Atlantic Financial Group, LLC, Registered Representative offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, a Licensed Insurance Agency, 8706 Commerce Drive, Suite 1, Easton, MD  21601 443-249-3311.  Brett M. Sause is an agent licensed to sell insurance through New York Life Insurance Company & may be licensed to sell insurance through various other independent unaffiliated insurance companies.  Atlantic Financial Group, LLC is independently owned & operated from NYLIFE Securities LLC & its affiliates.

“Atlantic Financial Group LLC as well as NYLIFE Securities LLC and its affiliates do not provide tax, legal or accounting advice.


Senior Outlook Today is your go-to source for information, inspiration, and connection as you navigate the later years of life. Our team of experts and writers is dedicated to providing relevant and engaging content for seniors, covering topics such as health and wellness, finances, technology and travel.