Retired surgeon Dave had $3.5M saved but kept growth assets in his traditional IRA, meaning heirs will owe ordinary income tax instead of capital gains on every dollar withdrawn.
Claiming Social Security at 62 filled Dave’s lowest-income years with taxable income, eliminating his best window for cheap Roth conversions before required minimum distributions begin.
McClure estimates the wrong account structure will cost Dave’s heirs hundreds of thousands of dollars, despite the underlying investments themselves being sound.
Financial advisor Chris McClure describes a couple he worked with, Dave and Annie, whose story illustrates a mistake that shows up constantly in wealth-stage planning. Dave, a retired oral surgeon who practiced for more than 30 years, spent three decades explicitly trying to leave his kids as much as possible, according to Chris McClure (independent financial advisor). His investments were fine. The accounts holding them were backwards, and by McClure’s own estimate the setup was on track to cost his children and grandchildren a few hundred thousand dollars. That figure is McClure’s estimate of the case, not an audited number, and it would not translate to any other family.
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Dave and Annie are McClure’s illustrative clients, not independently verified people, and every dollar figure here is his own account. McClure, who has been a financial advisor for 32 years, says the couple came to him with roughly $3.5 million. Per McClure, $2 million sat in an IRA and old 401(k) accounts, and about $1.5 million was in a taxable trust account. Dave’s plan fit in one sentence: spend the trust, leave the retirement money alone to grow, and claim Social Security at age 62, according to Chris McClure (independent financial advisor). That is the conventional playbook, which is exactly the point.
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A Question Nobody Had Asked in Thirty Years
McClure asked where next month’s money came from. Dave answered instantly: the trust account. McClure then asked why that account and not another, and Dave had no answer, because nobody had ever asked him. In McClure’s words, “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.”
Which Asset Belongs in Which Account
Three placements, and the logic that ties them together.
Fastest-growing assets belong in a Roth. Roth space is finite. Its value comes entirely from how much growth it shelters from tax forever, and per McClure it passes to children without the income tax a traditional IRA carries. Fill a dollar of Roth room with a bond and you shelter a little interest. Fill it with a growth holding and you shelter decades of compounding. You are choosing what to spend a scarce shelter on. As McClure puts it, “If you put bonds in your Roth, that means you use your best tax shelter on your slowest growing assets.”
Stable, slow-growing assets, cash, money market funds and short-term bonds, belong in the traditional IRA. That is where the least valuable tax shelter meets the lowest-growth holding.
Appreciating assets earmarked as inheritance belong in the taxable account. Under current law, heirs receive a step-up in basis, so decades of embedded gains can pass to them with the tax on those gains erased. McClure: “Your children receive a step up in basis.”
Growth is supposedly meant for the Roth and also for the taxable account, so which is it? Both. For a family whose goal is leaving money behind, both accounts pass growth to heirs efficiently. The traditional IRA is the one that hurts, because every dollar the heirs take out is taxed as ordinary income. McClure says it directly: “If you have too much stock in your IRA, that means every dollar of growth eventually comes out as ordinary income instead of capital gains.” That compounding tax exposure on a large pre-tax balance is the exact problem we mapped in a free guide on defusing the first-year tax bomb before required withdrawals start.
That is Dave’s error in one line, quoting McClure: “His investments were fine. The order was wrong.” And: “He had his stable money and his growth money in all the wrong accounts.”, according to Chris McClure (independent financial advisor)
Social Security at 62 Closed the Cheapest Tax Window
There is a stretch between a retiree’s last paycheck and their first required minimum distribution, which McClure places “somewhere in say your early 60s to early 70s”, when taxable income is often the lowest it will ever be, making Roth conversions unusually cheap. Dave filled that window with a Social Security check at 62 and left no room in the low bracket. We covered that specific tradeoff in our recent piece on Roth conversions at 62 while delaying Social Security to 70.
Annie Wanted Something Different
Annie, a retired school principal, wanted a different life from the plan Dave was optimizing for. She would rather help the kids and grandkids while she was alive than leave a larger estate. As McClure recounts her: “I’d rather give it to them now. That way I get to enjoy them.” And: “I’d rather have that conversation with a family at age 55 than at age 70.” McClure says she had been asking that question for about a decade without a real answer, because the structure was too tangled to answer it against. Annie had never looked at a statement in her life because Dave handled the money, which meant if he died first she would inherit the complexity on the worst day of her life.
Three Audit Questions to Run This Week
Can you say in one sentence where next month’s income comes from, and why from that account rather than another?
Do you know the actual number a 30% market drop would change about your spending, per McClure’s second audit question, not a feeling about it?
Could the spouse who does not handle the money run this right now, not eventually?
Failing all three means the plan is unstructured, which is a different and solvable problem. The first move is to lay the whole picture, every account, every holding, on one page and ask whether the fastest-growing dollars are sheltered, the slowest-growing dollars are parked, and the appreciating assets are positioned to catch the step-up. The common mistake is judging investments one at a time. Judge the arrangement.
Learn 7 Ways To Generate Income With A $1,000,000+ Portfolio
If you’ve saved over $1,000,000, this guide is for you. The last thing you want in retirement is to run out of money, you want your money to generate lasting income while you enjoy your life.
Now you can learn the strategies wealthy retirees use to fund their retirement with The Definitive Guide to Retirement Income from Fisher Investments. Download the guide today! (sponsor)
