Attaining Tax Control through Tax Diversification

By Steven Sweeney

Now more than ever, investors and their advisors should look for opportunities in the current tax environment that may provide tax relief in the future. The current tax regime is relatively favorable, but it could soon change because many advantageous provisions are scheduled to sunset at the end of 2025.

The Tax Cuts and Jobs Act of 2017 (TCJA) made significant changes to the tax code that lowered taxes for most Americans, especially those on the higher end of the wealth spectrum. For example, it lowered individual tax rates by restructuring income tax brackets, nearly doubled the standard deduction, and increased the lifetime gift and estate tax exemption significantly.

Without government intervention, most of the benefits from the legislation will sunset at the end of 2025. If this were to happen, the reversion to pre-TCJA rules could affect millions of Americans.

Most people don’t want to pay more in taxes. And the majority of Americans (67%) are concerned about taxes on their income in retirement, according to our 2023 Q2 Quarterly Market Perceptions Study.1 Given that it is difficult to predict what the future will bring, RIAs can help their clients take advantage of the tax environment now by creating a comprehensive, forward-looking financial plan that includes measures for tax diversification and control.

Here, we’ll address how this may be achieved within the context of the gift and estate tax, Roth conversions, and annuity solutions.

Gift and Estate Tax

In 2023, the federal gift and estate tax exemption stands at $12.92 million per person and $25.36 million per married couple. The sunsetting of the TCJA would result in the exemption reverting back to 2017 levels indexed for inflation or, in other words, approximately $7 million per taxpayer. The precise figures won’t be known until that day comes, but your clients near that threshold amount will need to consider carefully how a change in the estate tax would affect them and their beneficiaries. Gifting assets to a properly drafted irrevocable trust during their lifetime while the exemption is high is one approach many wealthy clients may consider.

Roth Conversions

To help clients control taxes, you should reduce the tax liability associated with large required minimum distributions (RMDs) from their retirement accounts, which currently begin at age 73. Those forced withdrawals and the accompanying taxes are the opposite of control.

With unknown tax changes on the horizon, it may be wise to have your clients consider Roth conversions before 2026 while income tax rates are relatively low. Moreover, Roth IRAs have no RMDs, and all qualified distributions are tax-free. You’ll need to explain to clients that when they do a Roth conversion, they pay the income tax liability upfront rather than at the time of distribution. But the benefits are significant, including the added advantage of being tax-free when left to beneficiaries.

As part of providing holistic financial guidance, it’s important to watch for opportunities to reduce taxes paid on retirement plan money. Deleveraging retirement assets from future taxes may mean more money for retirement expenses and could help surviving spouses navigate the vulnerable period after becoming a widow or widower. Depending on their circumstances, Roth IRA conversions may be appropriate even for individuals in higher tax brackets, thanks to after-tax returns and greater liquidity for owners and beneficiaries.

While Roth assets have obvious long-term tax advantages, the benefits of tax-free growth and income from the Roth accounts must be balanced with the several potential tax consequences in the short term. A qualified tax professional can help clients understand how a conversion could create the need for additional tax withholding or estimated tax payments, mean the loss of certain tax deductions and credits, alter Medicare surtax calculations, and affect taxes on Social Security benefits and Medicare premiums.


It’s easy to assume that married couples who plan for retirement together will always be together. That also assumes that they will always be taxed as a married couple.

But after a spouse passes, the survivor will eventually have to file as a single taxpayer—and the increase in taxes can be substantial. That increase in taxes can drain assets and reduce retirement income available for the surviving spouse.

One of the many advantages of an annuity is that it can work as a hedge against taxes in this scenario. For instance, an annuity can provide guaranteed lifetime income for both spouses, regardless of death order or income tax situation. This source of retirement income can be designed so that it will not be reduced if one spouse passes and will not be depleted due to a change in tax status or loss of Social Security.

Tailor Tax Advice to the Client

There isn’t a one-size-fits-all recommendation for your clients to take advantage of today’s favorable tax environment. That’s what makes your guidance critical to their financial success. You can help them establish tax diversification and create control in their financial plan now. Conversations with your clients about the role of taxes in their financial plan is a great place to start.

1. The Allianz 2023 Q2 Quarterly Market Perceptions Study was conducted in May 2023 with a nationally representative sample of 1,004 respondents age 18 or older.

Steven Sweeney is the vice president of advanced markets and solutions at Allianz Life Insurance Company of North America.

image credit: