Required minimum distributions force retirement savers to take taxable withdrawals out of their retirement plans and traditional IRAs, but advisors have four useful tools to help mitigate the impacts.
Addressing attendees of the Investment and Wealth Institute’s Annual Conference Experience in Nashville on Tuesday, Michael Kitces, director of wealth management for Columbia, Md.-based Pinnacle Advisory Group, outlined four techniques advisors can use to help their clients faced with making required minimum distributions, or RMDs.
“There are a number of situations in which you can try to help people save on their RMDs a little, but you can’t stop the train from coming,” said Kitces.
By federal law, American retirement savers are required to withdraw a portion of their defined contribution plans and traditional IRAs each year after reaching 70 1/2. Failure to take RMDs results in penalties on top of the tax burden caused by taking distributions from a retirement plan, said Kitces.
However, advisors have a few tools at their disposal to help their clients.
Couples Strategies
Advisors can try to leverage the age difference between clients who are married couples to lower RMDs, said Kitces, but such a strategy requires planning in advance and going against conventional wisdom.
Kitces suggests that advisors working with clients concerned about RMDs allocate money to a younger spouse’s IRA or defined contribution plan before allocating towards accounts in the older spouse’s name, because the older spouse will have to take RMDs first.
“It’s a little thing, but we see lots of firms who don’t actually so it,” said Kitces. “Some actually do it the opposite way and try to build up (the older spouse’s) IRA because they’re going to retire first. You have to be conscious of liquidity issues, of course, but we should be putting contributions into the younger spouse’s account first, and the older spouse is where we do withdrawals first.”
Delaying RMDs