Couple With Financial Advisor
Couple With Financial Advisor

Help Your Clients Plan for a Practical and Productive Retirement

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Retirement is something your clients have been dreaming about for years. They need to have enough money to pay the bills and do all the things they want to do, like travel or play golf. However, their reality could be quite different if they don’t plan ahead and make good financial decisions now. You can be a key player in helping your clients plan ahead for a practical and productive retirement

One of the most important decisions you can help your clients make is when to take their Social Security. As a general rule, delaying Social Security payouts as long as possible is the preferred course of action, but everyone’s needs and requirements are different. You can help arm your clients with the knowledge of how to manage their finances and tax brackets so they can make an educated determination. Let’s look at an example to help visualize the rationale for this decision.

Examples of Implications for Delayed Social Security Claims

A retired couple, both age 62, file their taxes jointly and have not claimed Social Security yet. They have $74,900 in long-term capital gains and qualified dividends from various investments through a brokerage house. They would be able to withdraw and spend as much as $20,700, up to the standard deduction combined with the personal exemption, from tax-deferred accounts and still have no federal tax liability. This is all thanks to long-term capital gain exemptions and the qualified dividends rate for individuals in the 15 percent and lower tax brackets.

While it sounds great, this zero tax bill may not actually be the best decision, depending on the amount of wealth they possess. If they have the means, this is the perfect time to convert traditional IRAs into Roth accounts. While this course of action will result in higher taxes in the short term, it could lead to drastically reduced taxes over the long term.

What is a Roth Account, and Why is it so Important?

Roth IRAs are an important part of any retirement strategy, so it’s important to understand them and how they differ from a traditional IRA. While there are many differences between these two accounts, the main one has to do with when and how your clients pay tax. With a Roth IRA, your clients pay taxes now on what they put into the account, but they pay no taxes on any qualified withdrawals. Their heirs do not pay income tax on the balance either. With a traditional IRA, they pay no tax on their contribution, but disbursements are taxed at the time of withdrawal.

Another major factor to consider when helping your clients with retirement planning is when to take disbursements. With a traditional IRA, your clients are required to start taking money out at the age of 70 1/2. With a Roth account, there is no age requirement at all. This means they can continue to add to the fund and watch it grow as long as they want. There are instances when they can take money out prior to the 59 1/2 minimum age limit without paying a penalty, such as paying for a house or for educational expenses, but these amounts are often taxable, so knowing the rules is helpful before deciding to take these disbursements.

If possible, your clients should delay their Social Security benefits and convert as much of the money in their traditional IRAs to Roth accounts before they turn 70. By not taking Social Security until age 70, your clients reduce their taxable income and increase the amount of their future monthly Social Security benefit. The reduction in taxable income leaves the field open for Roth account conversions. In addition, it will also help reduce the required minimum distributions they have to take later, which helps keep their tax bill lower.

Tax Bracket Management

Social Security can play a role in your clients’ tax bracket management. Couples like the one above, if they claim Social Security and file jointly, can end up paying federal income tax on up to 85 percent of their Social Security if their provisional income is more than $44K. Provisional income is basically adjusted gross income (not counting any social security benefits) plus tax-exempt interest and 50 percent of benefits. This possible taxation is something your clients may consider, especially since that $44K threshold does not take inflation into account. This causes most people to end up paying taxes on their Social Security benefits before too long.

As you can see, helping your clients plan for their retirement will be crucial to them having the lifestyle they’ve dreamed of. There are many factors to consider, including your clients’ income level and where their income comes from, as well as the type of retirement accounts. Helping your clients make the best decisions possible is a great way to prove your true value as a tax professional.

Editor’s note: This article is courtesy of Goldin Peiser & Peiser, LLP.

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