Financial advisor Chris McClure recounts the story of Dave and Annie, a couple whose situation illustrates a common mistake in wealth-stage planning. Dave, a retired oral surgeon who practiced for over 30 years, spent three decades explicitly trying to leave his children as much wealth as possible. According to McClure, the couple arrived with roughly $3.5 million. About $2 million sat in an IRA and old 401(k) accounts, while $1.5 million was held in a taxable trust. Dave’s strategy was straightforward: spend the trust, leave the retirement accounts to grow untouched, and claim Social Security at age 62. However, McClure estimates this flawed account structure will cost Dave’s heirs hundreds of thousands of dollars, even though the underlying investments themselves were sound.
The Problem With Untethered Decisions
McClure highlights that Dave made 30 years of decisions that made perfect sense on their own, yet none were evaluated in the context of the others. As McClure explains, “He made 30 years of decisions and every one of them made sense on its own. Not one of them was ever checked against the others.” The core issue was asset location—failing to place investments in the most tax-efficient accounts.
Which Asset Belongs in Which Account
Effective wealth transfer relies on understanding where different asset types should reside. The fastest-growing assets belong in a Roth IRA, where space is finite but its value lies in sheltering decades of compounding from taxes forever. McClure notes, “If you put bonds in your Roth, that means you use your best tax shelter on your slowest growing assets.” Stable, slow-growing assets like cash and money market funds belong in the traditional IRA, where the least valuable tax shelter meets the lowest-growth holdings. Finally, appreciating assets earmarked for inheritance belong in taxable accounts, where heirs receive a step-up in basis, erasing the tax on decades of embedded gains. Dave placed his growth stocks in his traditional IRA, meaning every dollar his heirs withdraw will be taxed as ordinary income rather than capital gains. In McClure’s words, “His investments were fine. The order was wrong.”
Social Security at 62 Closed the Cheapest Tax Window
Claiming Social Security at age 62 also eliminated Dave’s most advantageous opportunity for Roth conversions. The stretch between a retiree’s last paycheck and their first required minimum distribution—often in the early 60s to early 70s—typically features the lowest taxable income of their lives. By claiming Social Security early, Dave filled that low tax bracket with taxable income, leaving no room for cheap Roth conversions before required withdrawals began.
A Different Vision for the Family
Annie, a retired school principal, wanted a different approach than the one Dave was optimizing for. She would rather help her children and grandchildren while she was alive than leave a larger estate. As McClure recounts her perspective: “I’d rather give it to them now. That way I get to enjoy them.” However, because Dave controlled the finances, Annie had never looked at a statement. Had he died first, she would have inherited a tangled structure on the worst day of her life.
Three Questions to Run This Week
McClure suggests three fundamental questions to evaluate whether a financial plan is structured or chaotic. First, can you say in one sentence where next month’s income comes from, and why from that account rather than another? Second, do you know the actual number a 30% market drop would change about your spending? Finally, could the spouse who does not handle the money run the plan right now, not eventually? Failing these questions indicates an unstructured plan. The solution is to lay out every account and holding on a single page to ensure the fastest-growing dollars are sheltered, the slowest-growing dollars are parked appropriately, and the appreciating assets are positioned to catch the step-up in basis. The common mistake is judging investments one at a time; the focus must be on the overall arrangement.