Editor's Note: This article is part of the Financial Advisor series "How I Solved It." Advisors describe a client with a problem and what they did to help.
Jim Holtzman at Legend Financial Advisors has a 60-year-old client, a widower, who’s going to be retiring. The client works for a pharmaceutical company in Pennsylvania and had done a great job saving.
The client has $1.8 million in retirement assets in IRA and 401(k) plans, plus significant savings in taxable accounts. He is single and has no children and wanted to pass along as much money to his nieces and nephews as possible. He is not going to need the money from the required minimum distributions of his IRAs when he reaches age 70 ½. But his good saving behavior posed a problem: He is going to have significant RMDs anyway if he doesn’t do anything.
“So what can we do to drive down that number when he hits age 70 and half? That’s the first problem we’re really dealing with,” Holtzman says.
Another problem is the proposed SECURE Act (the Setting Every Community Up for Retirement Enhancement Act of 2019; H.R. 1994). The bill would no longer let IRAs being passed along to be stretched out over the beneficiaries’ lifetimes. The act instead would require that the money be distributed over 10 years. “That will increase the income taxation,” Holtzman says. (The bill passed the U.S. House of Representatives in May and is now stalled in the Senate.)
However, if it’s Roth IRA money they’re inheriting, it will lessen the burden, Holtzman says.
His client already maximizes his pretax contribution to the 401(k) plan. He also puts in after-tax money to shelter contributions in the plan.
“So what we’re looking at doing, we have a 10-year gap between retirement and required minimum distribution age. So what we’re looking at doing is doing Roth IRA conversions very aggressively for the next 10 years. And we’ll manage the income taxation of that by running income tax projections for him and doing this year to year.”
The client can take his pension plan earlier or he can delay it until 65. “And we’re going to consider waiting until 65 in his case; he’ll get a higher benefit and especially then that will open up the door more for Roth IRA conversions between 60 and 65 at a pretty low tax bracket.
It is also going to “open up an opportunity to delay his Social Security to age 70 to get the highest benefit possible,” Holtzman says. “And again it will allow more of an opportunity for Roth conversions, even after he starts taking his pension plan.