How to help your clients turn retirement savings into income

One step toward converting savings into income is to perform a Roth IRA conversion, when suitable. This takes money saved in a pre-tax IRA account and transfers those retirement funds into a post-tax Roth account. Through a Roth IRA conversion, clients would pay taxes on the money converted now and have income-tax-free withdrawals from the Roth IRA in the future.

A Roth IRA conversion may help some clients manage the taxes paid on IRA savings. If a client anticipates being subject to higher tax rates in the future than the taxpayer is subject to today, Roth IRA conversions may help the client ultimately have a source of income that is free from income taxes in retirement.

Converting an employer plan account or traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including, but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.

It is generally preferable that you have funds to pay the taxes due upon conversion from funds outside of your IRA. If you elect to take a distribution from your IRA to pay the conversion taxes, please keep in mind the potential consequences, such as an assessment of product surrender charges or additional IRS penalties for premature distributions.

If charitable giving is part a client’s retirement goals, it can also help their drawdown strategy. Using the appropriate charitable giving strategies can help reduce the client’s tax burden and preserve wealth.

A qualified charitable distribution or a donor advised fund may help your clients. A qualified charitable distribution can be used for charitable gifting while not increasing a client’s adjusted gross income. These gifts must come from a traditional or Roth IRA, the taxpayer must be at least age 70½ at the time of the gift, and the qualified charitable distribution counts toward meeting required minimum distributions.

A donor-advised fund separates the charitable gift and its tax benefits from the actual giving of the money to the recipient. That means, through a donor-advised fund, a client can achieve tax benefits today while giving a gift to charity later. This allows for a large charitable deduction without having to give the entire amount at one time. It helps avoid long-term capital gains taxes by gifting the asset and deducting the basis and the gain.

Many people prepare for retirement as a married couple, which comes with tax benefits. But, one spouse will likely outlive the other. This would leave the surviving spouse now filing as a single taxpayer, which can substantially increase a person’s tax burden. Coupled with the potential loss of a partner’s Social Security income, this can deplete savings faster than anticipated.

In order to help mitigate this tax risk, couples may consider adding an annuity to their portfolio as a potential tax hedge. This would provide lifetime income, regardless of the death order or income tax situation.

If a client has employer securities in their qualified retirement plan, they may be able to convert a portion of the total distribution from the plan from ordinary income into capital gain income. This would achieve a favorable tax treatment.

The distribution from the qualified retirement plan would need to be a lump-sum distribution in order to achieve the favorable tax treatment. To qualify, it would need to consist of the entire amount in the participant’s account, and it would need to be made following a trigger event, such as a death, disability, or attainment of age 59½.

Clients should consult a tax professional before using an NUA strategy.