Older clients face special challenges in preserving wealth and maintaining income to live on. The trick, according to advisors, is optimizing distributions from various accounts to fund living expenses as tax efficiently as possible.

A key component to all this is the Roth IRA, advisors say.

“For most retirees, this means spending first from required minimum distributions (RMDs), pensions and Social Security, then taxable accounts, then tax-deferred accounts, then tax-free Roth accounts,” said David Flores Wilson, managing partner at Sincerus Advisory in New York.

Roth conversions involve rolling money from a pretax retirement account such as a traditional IRA into a Roth, which incurs no income taxes on RMDs in retirement.

“The tradeoff is that you are potentially [realizing] income in a higher marginal income tax bracket today because you anticipate higher taxes in the future,” said Eric Herzog at Prime Capital Investment Advisors in Fargo, N.D. “You need ... the cash to pay the additional tax with dollars outside your IRA.

“If you’re approaching the next marginal income tax bracket and additional withdrawals from your IRA push you into the next bracket, you may want to pull those withdrawals from a taxable account, such as a taxable brokerage account or savings account,” Herzog said.

Roths must be held for five years before a client can touch the earnings; conversions also can’t be reversed.

“Roth conversions work well for so many of those with large IRAs in an estate tax situation who have moved to a low-tax state,” Wilson said. “Roth conversions paid for with non-IRA funds lower RMDs and the income taxes after the conversion, shrink the size of the estate and help avoid double taxation ... on the distribution of funds to the next generation.”

“Roth conversions convert one of the most tax-inefficient assets to inherit to one of the most tax-efficient assets to inherit,” added Jody R. King, CPA, director of wealth planning at Fiduciary Trust Company in Boston. “Roth conversions can be attractive for [clients] who want to be able to manage their future RMDs, as well as the IRMAA impact of taxable withdrawals that would otherwise be required from traditional IRA. The tax-free growth can also be compelling for someone who may live for many more years.”

“Many 60-plus folks want to put off or reduce RMDs, which now start at age 73. Investing in a Roth IRA is a good way to do this,” said Mary Kay Foss, a CPA in Carlsbad, Calif., adding that clients who are still working can direct some of their 401(k) deferral to the Roth portion of the plan.

“Once RMDs begin, Roth conversions are more difficult,” Foss warned. “One has to take the RMD before they can do the conversion.”

The extended RMD age can provide a longer runway to completing conversions over time, before RMDs are required. “You can also look for ways to use those IRA dollars for other goals, such as to pay for long-term care premiums annually instead of potentially needing a lump sum from the IRA to cover needs, which can hike up taxable income in any given year,” said Kassi Hyde, wealth management advisor at Apollon Wealth Management in Peachtree Corners, Ga.

Assessment of financials is a first priority, advisors say.

“Wealthy families are prone to having an uninventoried and uncurated collection of assets, including financial accounts,” said Jean-Luc Bourdon, a CPA at Lucent Wealth Planning in Santa Barbara, Calif. “Some high-net-worth clients may find out they have a low taxable income—opening the door for Roth conversions.”

“Be strategic not only about asset allocation but also about asset location—which holdings are in which types of accounts,” said Sam Petrucci, head of advice, planning and fiduciary services at Neuberger Berman Private Wealth in New York. “Utilizing a tax-deferred account like an IRA to hold securities such as private debt or high-yield corporate bonds, which generate short-term capital gains or ordinary income taxable at a [current] top federal rate of 37%, can be advantageous.”