Retirement fund withdrawal strategies can save clients hundreds of thousands of dollars in taxes if applied effectively, according to two retirement and Social Security experts.
Congress is debating, and probably will pass, changes to the required minimum distribution (RMD) age for tax deferred retirement accounts, but any changes should be used in the context of an efficient retirement fund withdrawal strategy, said Bill Meyer, founder and CEO of Income Solver, a retirement software platform, and William Reichenstein, head of research for Retiree Income and Social Security Solutions, platforms designed to help advisors and near retirees to map retirement strategies.
The two recently conducted a webinar on the SECURE Act 2.0 for Financial Advisor Magazine. The original SECURE Act increased the age limit for requiring distributions from tax deferred retirement accounts from 70.5 years of age to 72, and the new version of the legislation, which may get through the Senate as early as July, would further increase the age limit in stages over the next decade.
But just because minimum distributions are not required until a later age does not mean an individual retiree should wait until then to take distributions or convert some of the money to pre-taxed Roth IRA accounts, Reichenstein and Meyer said. Using strategic withdrawals from tax-deferred and pre-taxed accounts can limit tax liability over the lifespan of a retirement by more than $300,000 for some individuals and couples, the two researchers said. Taking out tax deferred funds when tax liability is lower can mean huge savings, Meyer said.
Instead of waiting until the retiree’s age mandates withdrawals—and tax payments on the deferred accounts—it might be advisable to take some tax deferred distributions earlier than required, he said. Funds can be used to fill out lower income brackets for tax purposes or otherwise used for more tax savings.
Reichenstein and Meyer used examples of a single woman and a married couple to show the tax savings each could achieve with strategic, tax-planned, tax deferred account withdrawals.
The SECURE Act 2.0 will give retirees additional flexibility. “But advisors should not be tricked into thinking that all tax-deferred account withdrawals should wait until the law demands that your clients do so,” Meyer said in an interview.
The extended withdrawal strategies can even be applied to retirees and near retirees in their 60s as Roth conversions and timed withdrawals are used to limit tax liability over an extended period of time before required minimum distributions start, he said. According to a study released by the American College of Financial Services last month, specialized retirement planning was the number one priority for 71% of the more than 1,000 consumers surveyed.
“This is a good opportunity for advisors to use planning tools so that Medicare and taxes on Social Security do not go up because of the withdrawals,” Meyer said. “Withdrawal strategies should be designed specifically for each retiree. It should not be assumed that avoiding all tax-deferred account withdrawals until the retiree is forced to make them is advantageous,” he added. Advisors should use specialized strategies to “highlight your advisor alpha to deliver specialized advice to grow and differentiate (your practice) by leveraging decumulation strategies.”