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April 17, 2024 at 02:08 PM
What You Need to Know
- Traditional retirement accounts are
- Clients with large balances may wish to examine their tax situation and start taking money out early or consider Roth conversions.
- Beware of IRMAA surcharges once Medicare kicks in.
Many clients spend decades accumulating income to fund living expenses during retirement. For most, those retirement funds are locked into traditional retirement accounts during the client’s working years.
While advisors pay significant attention to making sure that clients maximize the value of pretax retirement contributions during those working years, it’s also common for clients to start paying less attention to individual retirement account planning options as years go by. That’s often because those funds are “locked up” and, with any luck, in growth mode during working years.
Once clients reach their 60s, however, it makes sense to start exploring the options for their IRA balance. That’s because traditional retirement accounts are “unlocked” once the client reaches age 59.5 — and some clients may benefit from taking action sooner rather than waiting until age 73.
As with any tax reduction strategy, clients should be aware of the pros and cons before proceeding. For those interested in reducing future RMDs, the mid-60s may be the prime time to act.
Why the 60s Matter
Before clients turn 59.5, they’re generally unable to access traditional retirement funds. Unless they have experienced a hardship or qualify for another exception, the 10% early distribution penalty will apply in addition to ordinary income tax rates.
Once clients reach 59.5, however, they can access retirement funds without penalty. While ordinary income tax rates will still apply to any distributions of pretax contributions, tax rates are relatively low since the 2017 tax overhaul.
So, clients are able to access their retirement funds without penalty but aren’t required to start withdrawals. Once they turn 73, the current required beginning date, they must start taking annual distributions based on their life expectancy and account balance.
