A retired couple came to us with $10 million and a broker who was doing his job. That was the problem.
They are in their early sixties, one year into retirement. Roughly $10 million in net worth: about $3 million in a traditional IRA, about $3.5 million in taxable investment accounts, and the balance in real property and other holdings. All of it sits with one national brokerage firm.
When they need money, they call their broker. He sells what he has to and does a capable job holding down the capital gain. Their taxable income last year landed in the 22% bracket.
Nothing about that description is a scandal. Their accounts are invested sensibly. Their broker returns calls. He has not churned them, sold them anything strange, or lost them money. By the standard most people use to judge a financial professional, he is doing fine.
He is also, without meaning to, in the middle of costing them several million dollars.
The difference nobody explains
Investment management answers one question: how is the money invested?
Financial planning answers a different set. When should income be recognized, and in what form? What happens at 73 when the IRS starts dictating withdrawals? What does the state do at death? Where does spending come from when the market is down 30%?
These are not harder questions. They are just different ones, and a portfolio manager is not paid to ask them. The trouble is that most people assume the two services are bundled. They are not, and the gap does not announce itself. There is no monthly statement line item for "planning you didn't get." The bill arrives fifteen years later, all at once.
Here is what nobody had looked at.
One: the conversion window closes at 73
This couple is in the lowest-tax decade of their lives and does not know it.
They are retired, so there is no W-2 income. They have not started Social Security. Their IRA is untouched. The only income hitting their return is what the taxable portfolio throws off and whatever their broker sells. That is why they are sitting in the 22% bracket with $10 million in assets.
That window closes twice over. Social Security starts, and then required minimum distributions begin at 73 and force taxable income whether they want it or not. A $3 million IRA growing for another decade becomes a much larger IRA, and the first RMD off it will push them into brackets they have never seen.
The planning move is to fill the 22% and 24% brackets deliberately every year between now and then, converting IRA dollars to Roth at a rate they choose rather than a rate the IRS chooses later. Done as a coordinated ten-year sequence, our analysis projected more than $2 million in federal and Illinois income tax and Medicare IRMAA surcharges avoided across their joint lifetimes.
Two details make the number larger than people expect.
IRMAA runs on a two-year lookback. Medicare premium surcharges are set by your modified AGI from two years prior, and they operate on cliffs — one dollar over a threshold moves you to the next tier for the whole year. Uncoordinated RMDs walk retirees across those cliffs repeatedly. Coordinated conversions let you choose which years take the hit.
The survivor files single. When the first spouse dies, the survivor keeps most of the income and loses half the bracket width. A couple comfortably in the 22% bracket becomes a widow or widower in the 32% bracket with the same money. Roth conversions done while both spouses are alive move dollars out of that future at today's joint rates.
Neither of these is exotic. Neither had been mentioned.
Two: the Illinois estate tax nobody mentioned
Illinois taxes estates above $4 million.
That number does not move. It is not indexed to inflation, so it gets smaller in real terms every year while portfolios grow. And it does not port to a surviving spouse the way the federal exemption does — if the first spouse to die does not use their exclusion through proper trust structure, it is simply gone.
The mechanics are harsher than most people assume. Once an estate crosses $4 million, Illinois does not tax only the excess. The tax is computed on the estate as a whole, which means crossing the line by a small amount produces a very large first bill.
This couple's trust was drafted when their net worth was roughly $3 million. It was appropriate then. It has not been reviewed since, and their net worth has more than tripled.
They believed they had no estate tax problem, and they had been told as much — because the federal exemption sits far above their estate and nobody had raised the state layer. Their Illinois exposure alone is a seven-figure number. They are not moving out of Illinois. It is addressable today through trust redesign and, potentially, an irrevocable life insurance trust to fund the liability outside the taxable estate. It is not addressable after a death.
Three: not one dollar is protected from the market
Every dollar they spend comes out of invested assets at whatever the market happens to be doing that week.
There is no reserve insulated from volatility. No cash tier. No bucket sized to carry them through a bad stretch without selling into it.
This has not hurt them yet. They retired into a decent market and their withdrawals have been small relative to the portfolio. But the risk here is sequence, not skill. A retiree who is forced to sell equities during a 30% drawdown to cover living expenses converts a temporary decline into a permanent loss, and no amount of good security selection undoes it. Their broker cannot fix this by picking better investments. It is a structural question about where spending comes from, and it has to be answered before the market asks it.
What this adds up to
Over $2 million in projected lifetime income tax and IRMAA surcharges. A seven-figure Illinois estate tax exposure with an unrevised trust. And zero dollars of spending money shielded from a market decline.
Their broker did nothing wrong. He simply was not hired to do this.
Four questions worth asking your own advisor
If any part of this sounds familiar, these are the questions that surface the gap quickly:
- What is my multi-year tax plan? Not "what did I owe last year" — what is the plan for the next ten years, and what does it assume about rates?
- What happens to my tax situation when RMDs start, and when one of us dies? If your advisor has not modeled the survivor filing single, they have not modeled your actual future.
- What is my state's estate tax exemption, and when was my trust last reviewed against my current net worth?
- Where does my spending come from if the market drops 30% next year? If the answer is "we'd sell something," there is no plan.
An advisor who cannot answer these is not necessarily a bad advisor. They may just be a very good investment manager. But if that is all you have, you should know it — because the cost of the difference does not show up until the window to fix it has closed.
Hypothetical case study. Figures are rounded and identifying details altered; this does not describe any specific client and no client information has been disclosed. Projected tax figures represent a nominal, undiscounted sum of estimated federal and Illinois income tax and Medicare IRMAA surcharges over an assumed joint lifetime under current law, using stated assumptions as to income, spending, portfolio growth and filing status; they are not present values, are not a guarantee of future results, and individual results will differ. Tax law is subject to change. ClearGuide Wealth does not provide legal advice; trust and insurance strategies should be reviewed with qualified counsel.