For those clients who "don’t want their RMDs," planning may reduce the tax effect, help manage threshold limits for Social Security taxes and Medicare Parts B and D premiums, and the Net Investment Income Tax (NIIT). Here are some key points to consider.
Is age 50 too early to begin planning for RMDs? Maybe not. If your client has large qualified plan accounts (for example, 401(k) and 403(b)), he or she might consider limiting future contributions, or switching to a Designated Roth Account (DRAC) or Roth IRA (via contributions or conversions). Some may even decide to contribute to nonqualified tax-deferred accounts, as those do not have to be "spent."
If your client plans to retire early, he or she might be better off spending some of that qualified plan account now. Considerations for whether to spend now might include (but are not limited to): what is the client’s current effective tax rate, what other assets does your client have available to produce income, and is your client old enough to avoid the 10% additional tax. Using some qualified plan money today may help control taxable income in the future, and help manage income for threshold limits.
If your client is working past age 72, he or she may be able to delay RMDs from an employer’s qualified plan (including assets rolled into the plan). There is a catch to qualifying for the delay. At age 72, the client cannot own 5% or more of that employer, including ownership attributed to the client. This tends to work best for those who work for larger companies or organizations.
Are your client’s current tax rates lower than prior years? Does he or she have an ordinary loss on the tax return? Then this may be the perfect time to do some Roth conversions. Or, to change 401(k) contributions from the pretax to the DRAC. In addition to reducing future RMDs, this creates a tax-free income bucket for use in retirement. Remember—recharacterization of conversions is no longer permitted, so a conversion is final.
Is your client charitably inclined? Qualified charitable distributions (QCDs) are a tax-efficient way to make gifts directly from the client’s traditional IRA to qualifying 501(c)(3) charities. The client must be older than age 72, the check must be from the traditional IRA, inherited IRA, or inactive SEP-IRA or SIMPLE IRA, and made out to the appropriate charity. The client may use up to $100,000 per year to satisfy the RMD. A distribution can cover all, or part of, an RMD. The distribution can be greater than the RMD, but any distribution more than $100,000 is taxable. A correctly executed QCD is not added to adjusted gross income (AGI), thus lowering income and often taxes as well. QCDs cannot be made from qualified plan (for example, 401(k) and 403(b)) assets.
Help your client be selective. For IRA owners, remember IRAs are aggregated to determine the RMD amount; however, the actual distribution can come from one account or from several accounts (with annuitized payments excluded after year 1).
For additional information about RMDs and QCDs, please feel free to contact the Retirement Strategies Group at (800) 722-2333 or email us at RSG@PacificLife.com.
Pacific Life, its distributors, and respective representatives do not provide tax, accounting, or legal advice. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor or attorney.
Pacific Life is a product provider. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.
Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.
Variable insurance products are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA) and an affiliate of Pacific Life & Annuity Company. Variable and fixed annuity products are available through licensed third parties.
No bank guarantee • Not a deposit • Not FDIC/NCUA insured • May lose value • Not insured by any federal government agency
For financial professional use only. Not for use with the public.