3. Using the withdrawals to fund Roth conversions. Their brokerage accounts can support their spending needs and the taxes they’ll owe on the IRA withdrawals.
What about estate planning? From a tax perspective, most wealthy clients benefit from emptying their IRAs before death. New rules have accelerated the schedules for disbursing inherited IRAs to beneficiaries, often adult children. The latter will probably be in their prime working years and subject to higher tax brackets than their parents were in retirement.
How about married couples? Married couples have different challenges and opportunities. The biggest challenge is that a widowed spouse, as a single filer, has about half as many options for deductions and tax bracket shifts as a couple filing jointly. That can lead to tax surprises for a survivor at a difficult time.
The opportunities lie in taking voluntary IRA withdrawals to manage tax liabilities while both spouses are living. These withdrawals will reduce RMDs (and taxes) for a surviving spouse.
Couples born in different calendar years have different RMD rates. Couples often benefit from voluntary withdrawals from the older member’s IRA to reduce their combined RMDs. The voluntary withdrawals can fund Roth conversions.
Who doesn’t need to worry about RMDs? Individuals with small IRAs (or equivalents) do not need to worry about RMDs. They’ll need their withdrawals to support their retirement spending. Their more significant concern is outliving their savings. Often, they should delay retirement and Social Security benefits (to increase monthly payments) if they can.
When should people (and their advisors) begin to plan how to manage their RMDs and other IRA withdrawals? The answer: sooner rather than later. Years of retirement savings can make the transition to decumulation frightening and confounding. Inertia can set in. Clients fail to plan or take action to limit taxes over their retirement and extend the value of their savings.
Clients respond best to advice when presented with illustrated, multi-year charts that account for their income needs (collected in financial planning) and tax liabilities. Advanced income-sourcing software can help you deliver the latter.
Then, you can propose a course for RMDs and voluntary withdrawals from IRAs and brokerage accounts that support their spending needs and cover their tax bills—that you have successfully minimized.
Paul R. Samuelson is the chief investment officer and co-founder of LifeYield.