Circumstances

Opportunities 

Three of the most common scenarios that are exempt from the additional 10% federal tax on early distributions are:

1. Substantially equal periodic payments (SEPP)/72(t) program
2. Inherited IRAs established by beneficiaries
3. Single-premium immediate annuities (SPIAs) with a lifetime payout option

Consolidate Retirement Accounts

Most pretax retirement accounts accumulated from prior employers’ retirement plans (i.e., 401(k), SEP-IRA, SIMPLE IRA¹) can be rolled over and combined into a single IRA for easier management of assets.

Circumstances

Opportunities 

A client can receive increased Social Security benefits by waiting until full retirement age or delaying until age 70 to claim those benefits. During this waiting period, a client may consider accessing other retirement assets to meet income needs and look to differentrollover options to accomplish this. 

Be cautious in advising a client to take unnecessary taxable income while receiving Social Security benefits. Doing so may increase the percentage of those benefits that are taxable (up to 85% of benefits may be included as income).

One possible option to help manage the taxes due on Social Security benefits: Consider a Roth IRA conversion before the client claims Social Security benefits. Although the conversion is taxable, this may provide a tax-free source of income in the future, because qualified distributions are not taken into account when determining taxability of Social Security benefits.

Circumstances

Opportunities 

Converting to Roth IRA

With no RMD requirements, Roth IRAs provide more flexibility regarding how much income your client chooses to take at any one time. They also provide a possible source of income that may be income-tax free. Taxes are due on the fair market value of the amount converted.

Important Reminders

IRA: IRA owners (traditional, SEP, and SIMPLE) who reached age 73 on 1/1/23 or later must begin taking RMDs no later than April 1 of the year following the year he/she turns age 73.

Employer-sponsored plans: If a client is not an owner of a business (5% or more ownership) and still employed by an employer that offers a qualified plan [i.e., 401(k) and 403(b)], he/she may be able to delay RMDs until April 1 of the year following the year of retirement.

Guaranteed Income for Life

A single-premium immediate annuity (SPIA) can guarantee steady lifetime income. Many payout options are available to help meet a client’s specific income needs, and the annuitized portion also may help the client meet RMD requirements.

A deferred income annuity (DIA) purchased with a portion of retirement assets specifically as a qualified longevity annuity contract (QLAC) could help reduce future RMDs and create pension-like income to hedge longevity risk.

Legacy Planning with a Roth IRA

Tax advantages for beneficiaries: If a client wants to help minimize taxes for beneficiaries, he/she can convert a qualified plan or traditional IRA to a Roth IRA. This may allow beneficiaries to access the Roth IRA portion of their inheritances without tax ramifications.

Deferral advantages for Roth IRA owners: While traditional IRAs and inherited Roth IRAs have RMD requirements, Roth IRAs do not. Therefore, Roth IRAs (if they are not inherited) provide more latitude than a traditional IRA when it comes to deferring distributions. A client can accumulate assets in the Roth IRA for as long as he/she wishes and then pass them along to beneficiaries upon death.

Beneficiary Considerations

Updating beneficiary designations: Talk to your client to ensure he/she has named the appropriate beneficiaries. This will help avoid unintended consequences when transitioning assets.