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No one is short on theories about taking required minimum distribution

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There are all kinds of theories associated with taking required minimum distributions, as is evidenced by the different approaches detailed by financial advisors interviewed by Income Planning.

Retirement savings products create a “psychological lock box,” according to Gregory Aloia, a financial advisor with Abacus Wealth Partners, Philadelphia. The theory is that once the money is in hand, it is easier to spend it, he continues.

A solution to this temptation, Aloia offers, is to have it automatically put in a savings vehicle. He notes that most of his clients would rather not take a required minimum distribution but are required to under law.

Tom Davison, a certified financial planner with Summit Financial Strategies, Columbus, Ohio, concurs. “RMDs can be detrimental to retirement income spending if they don’t need to spend the full amount. Some clients tend to spend whatever shows up in their checking account.”

However, Davison says that a taxable brokerage account can be paired with an individual retirement account so that the IRA withdrawal can go directly into the brokerage account, and then be “metered out” to a checking account.

Frank Boucher, a financial advisor with Boucher Financial Planning Services, Reston, Va., says he has spent a large part of his career explaining to IRA and qualified plan participants why they have to take RMDs. People fall into 2 camps, he says: those who need the funds and those who do not and would rather not take them.

Boucher notes the alternative of converting a traditional IRA to a ROTH and paying taxes in the year of the conversion. Currently, there are some restrictions, such as a limit on this choice to those with an adjusted gross income of under $100,000. But the good news for those with AGIs over that amount is that in 2010, the $100,000 income limitation will be lifted and taxes can be paid over a 2-year period rather than a 1-year period, he says.

Jeremy Portnoff, a financial advisor with Portnoff Financial LLC, Westfield, N.J., says that a ROTH conversion makes sense for those who do not need to take RMDs but are forced to take distributions. The reason, he explains, is that one can lock into a tax rate before it goes up. The individual who converts also does not have to take an RMD and qualified distributions are not included in income and will not affect taxation of Social Security benefits, he says.

Mark Ferrell, director-advanced planning with McLean Asset Management Corp., McLean, Va., holds a viewpoint counter to most financial advisors and their clients. Ferrell says he “actually likes RMDs” because they are an actuarial assessment of how much should be withdrawn so that there is a $0 balance at death.

From an estate planning standpoint, Ferrell notes, RMDs are treated as income in respect of the decedent and do not get a step-up in basis. Income in respect of the decedent is income that is due an individual who dies. A step-up in basis establishes the value of an inherited asset at the time of the owner’s death rather than at the time of purchase.

Distributions from IRAs are taxable, so if children are in the 35% tax bracket, it would be better for them to receive an asset that gets a step-up, he adds.

The only potential difficulty with an RMD, he notes, is tax planning for large distributions.

Paul Grangaard, owner of Retirement Income Solutions and a consultant with Woodbury Financial, St. Paul, Minn., a unit of Hartford Life, structures his income planning program to account for RMDs. He says that if someone retires early, say at age 55, then single premium immediate annuities can work up until the age when RMDs start, 70-1/2.

At age 70-1/2, Grangaard says he would use RMDs to establish a structured bond ladder to provide income if the client still has a substantial amount of money in qualified accounts. Then, at very advanced ages, say for example age 90, whatever remains in the IRA could be used to purchase a SPIA with a life certain period, he says. Because there is an annuitization, there would not be any further RMD requirement, he adds.

Using SPIAs is viable for a number of reasons, according to John Rasberry, chairman of Rasberry Agency, Ltd., in Charlotte, N.C. One reason is that the “the income tax impact can be spread over a lifetime rather than in one year, he says. If set up for life or joint life-only, the estate taxes will be reduced.” He also cites the benefit of getting a regular check. “I’ve never seen anyone that did not like getting a check every month.”

However, Rasberry adds, the SPIA must be purchased by a trustee through a trust rather than the retiree; this avoids triggering constructive receipt of the income, which would therefore be taxable.

Even though Rasberry says he believes the SPIA is a good solution, he also muses that “this market is absolutely void and I don’t know why. Perhaps most of this money is managed by “investment advisors” and they can’t stand money not under fee-charging activity. Who knows?”

Warren Ward, a certified financial planner with Warren Ward Associates, in Columbus, Ind., says that the most likely group to miss taking an RMD is the “do-it-yourself” type who is no longer able to keep track of multiple accounts.


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