Last chance to accumulate
Clients and prospects in their 50s may be in their last decade to accumulate assets for retirement. It is also an important time for them to consider a retirement income planning strategy.
Make sure all of your clients age 50-plus know about catch-up contributions to qualified retirement plans and IRAs by calling them for a contribution review.
Opportunities to target include
- spousal IRAs
- build out funding vehicles that will give your client future tax planning flexibility when he or she starts taking distributions
- define your role as lead retirement professional
"As your lead retirement professional I want to make sure we do all we can today to add more to your retirement plans to potentially have more to work with when you retire. Let's take a look at your catch-up contribution opportunities."
Affluent clients considering retiring early might use the Separation from Service After Age 55 option under 72(t) to withdraw assets from their 401(k) plan. They would pay only ordinary income on the amount withdrawn with no penalty.
Also, you will want to check if your client has company stock in his or her 401(k) with net unrealized appreciation (NUA) and consider the suitability of a tax-free IRA rollover. Read Distribution of employee stock from 401(k) plans (see below) for details.
"Before you decide what to do with your retirement plan, let's make sure we review both what's in your plan and when and how you plan to use your funds. I want to make sure I help you avoid unnecessary taxes or penalties."
Let clients and prospects know they now can withdraw assets from retirement plans without a 10% penalty from the IRS. Invite them in for a retirement income planning session. Opportunities to uncover may include
- in-service distributions
- Roth IRA conversions
- asset allocation - portfolio positioning
"You're approaching a key retirement income planning milestone. There are many different options allowed by the IRS. I'd like to get together to review what these may mean to you and make sure we're on track with your retirement goals."
Transition to retirement
Your clients in their 60s now need to understand the importance of building a distribution strategy to try and maximize income in a tax-efficient way.
62 is the age most individuals start taking Social Security benefits. However, clients who start at this age will receive a 25% permanent benefit reduction. Be sure to call clients a month in advance of their 62nd birthday to alert them to the reduction, as well as Social Security taxation and limited distribution strategy consequences.
Opportunities to target may include
- meet with clients' CPA and start to create a distribution strategy
- consolidate clients' retirement plan assets
- Roth IRA conversion
"You're approaching an important age as it relates to retirement income planning, and I'd like to get together to review your plan." When you meet, tell your client "Although I'm not an expert on Social Security, I can help you consider how your potential Social Security benefits fit in to your overall plan."
Make sure your clients sign up for Medicare on or before their 65th birthday.
Some opportunities to consider:
- working with clients' CPA to execute draw-down strategies
- Stretch IRA
Send a birthday card three to four months before each client's 65th birthday. Include a note that says "Happy early 65th birthday! Your Medicare enrollment clock is ticking! Let's meet to make sure you know what this means to you!" Or, call them and say "This is a big birthday in terms of retirement planning. Let's meet for lunch to review what's coming up."
First-wave boomers (born 1943-1954) are eligible for full Social Security benefits at age 66. Some strategies you and your clients may want to consider:
- adjust draw down strategy to account for taxation of benefit
- possible partial Roth IRA conversion
- for married couples review survivor benefits
"Now that you have decided to begin taking your Social Security benefits, I thought it would be a great time for us to review your retirement income planning strategy with your CPA. We may have to make adjustments to account for the taxation of your Social Security benefit."
60s support material
Taking tax-efficient income distributions
Tax-efficient income distribution becomes paramount when clients are in their 70s. Also, at this time they may want to discuss their beneficiary designations and consider their legacy strategy.
Age 70 is when Social Security maxes out. This is your last chance to help clients reposition assets before Required Minimum Distributions (RMDs) begin. Once RMDs begin at 70½, strategies for tax-efficient management become more limited.
Opportunities to pursue now include
- last chance to consolidate assets before RMDs begin
- 5498 reporting to IRS by IRA trustees
- Roth IRA conversions can take place at any time
- get to know the beneficiaries
- review distribution strategy with client and CPA
Call clients several weeks before their 70th birthdays and say "This is a major milestone, and I would love to celebrate it with you. How about a birthday lunch next week?" Encourage them to invite a friend or two. (If a client's plan is to wait until 70 to begin Social Security benefits, make this call six months prior to his or her 70th to review the current income plan.)
Make sure your clients are aware of the RMDs from their Traditional IRA and perhaps other retirement plan accounts. You don't want them to pay the high price of failing to take their RMDs - a 50% deferral tax penalty on the amount that should have been taken. You, your clients, and their CPAs will need to determine the aggregate required RMD from the client's IRA.
Once an individual reaches age 70½ the rules for both plans and IRAs require the periodic withdrawal of certain minimum amounts. However, if the individual is still working at 70½, and does not own 5% or more of the business, they are generally not required to make a required minimum distribution from a current employer plan.
Some clients may be required to take an RMD that is more than they need. Perhaps your client can use the excess to:
- fund a 529 college savings plan for grandchildren
- add to insurance for estate planning purposes
- make a charitable gift
- add to their brokerage account
"Happy early half birthday! You have a major milestone approaching at 70½. That's the age that the IRS makes you start taking Required Minimum Distributions. I'd like to suggest we meet to make sure you're on track to begin to take your required IRA distributions, to make sure you can avoid the 50% penalty the IRS may assess."
70s support material
There are advantages and disadvantages to an IRA rollover depending on investment options, services, fees and expenses, withdrawal options, required minimum distributions, tax treatment and the investor's unique financial needs and retirement plans. Please be aware that rolling over retirement assets into one IRA account could potentially increase fees as the underlying funds may be subject to sales loads, higher management fees, 12b-1 fees, and IRA account fees such as custodial fees.
MFS does not provide legal, tax or accounting advice. Any statement contained in this communication (including any attachments) concerning U.S. tax matters, was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. This communication was written to support the promotion or marketing of the transaction(s) or matter(s) addressed. Clients of MFS should obtain their own independent tax and legal advice based on their particular circumstances.
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