Four Ongoing Tax Considerations for Advisors with Retiree Clients

Four Ongoing Tax Considerations for Advisors with Retiree Clients

Consider using the coming weeks and months to put your clients through a tax-day post mortem.

Each year after April 15 has passed and throughout the summer, many investors place tax issues on the back burner until the next batch of 1099s arrive in January’s mail. Some, as we know, will delay even further, procrastinating until the filing deadline approaches before reluctantly deciding to tackle their tax situations again. This cycle then repeats itself year after year.

While it’s easy to sympathize with these impulses, doing nothing until next filing season won’t solve anything. Taxes—especially unnecessary, additional taxes that could potentially be avoided—are a burdensome expense that can have a major impact on a retiree’s ability to meet retirement income goals. Effectively navigating taxes could mean the difference between living comfortably in retirement and stressing over financial obligations.

Currently, there is a wide range of financial planning strategies available to help manage tax liability, not only year by year but well into the future. However, with very few exceptions, it’s nearly impossible to employ any of them after the tax year has concluded (i.e., during the filing season). Indeed, it takes months—if not years—of planning and execution before such strategies can begin to yield results, meaning that pre-retirees and retirees need to get started now if they haven’t already.

This is where advisors come in. Act now to help your clients understand that when it comes to taxes, there is no offseason. Otherwise, they could eventually confront grievous, potentially long-term consequences when they can least afford to—literally.

With this in mind, consider using the coming weeks and months to put your clients through a tax-day post mortem, examining the cost and reasoning associated with each client’s financial obligations while searching for ways to help manage the burden.

Here are four important ways for you to create more tax efficiency for your pre-retiree and retiree clients:


Review Social Security Income

The way Social Security benefits are treated by the tax code is often a source of great confusion. Up to 85 percent of one’s total benefit could be subject to taxation, though in most cases the actual rate of taxation is far lower. In fact, some beneficiaries don’t pay any taxes on their Social Security income.

The first thing you need to determine is whether your retiree—or, in some cases, pre-retiree—clients pay taxes on their benefits and, if so, how much. Ultimately, the answer will depend on a number of key factors including the size of the benefit, the client’s marital status, and the client’s other sources of income. Managing these income sources can have a dramatic effect on the amount of taxes retirees will potentially pay over their lifetimes.


Seek to Convert Traditional IRA Assets Before RMD Age 

When investors turn 70.5, they must begin taking required minimum distributions (RMDs) from traditional IRAs and qualified retirement plans. RMDs generally start at a little under 4% of the previous year’s ending balance, and the percentage gradually increases each year. Deferring distributions until they are required can result in larger RMDs, which  may subject more of a client’s Social Security benefit to taxation or push some of that client’s income into a higher tax bracket. In an effort to manage these potential future liabilities, you should consider opportunities for your pre-retiree and younger retiree clients with large IRA balances to convert some of these assets.

There are multiple layers to this issue, but for simplicity’s sake consider the following hypothetical scenario: a client with a $1 million traditional IRA has to take a distribution of roughly $40,000 the year she reaches age 70.5. This could be problematic if she has other significant sources of income, potentially forcing her to pay relatively high marginal income tax rates well into retirement.

To remedy this situation, this client may want to convert portions of her traditional IRA into a Roth IRA each year using her current tax bracket. While this will take a few years and no doubt lead to higher taxes in the short term, it may lower future obligations considerably by reducing the RMD and potentially reducing the tax on her Social Security benefits, possibly keeping the client in a lower bracket for years to come. Provided the Roth IRA has been established for at least five years, withdrawals are tax-free and won’t affect the level of cash flow from her portfolio.

Consider Deferring the Start Date of the Social Security Benefit 

Delaying the starting point of benefits allows them to increase each month until your client reaches age 70. Also, by delaying the benefit, there is more room in the lower tax brackets to take IRA distributions or do Roth conversions. By spending down or converting IRA assets before RMD age, you may lessen the IRA balance and the RMD. Upon reaching age 70, clients have a much larger Social Security benefit and a smaller RMD, which may result in a much lower overall tax liability for the rest of their lives. Just make sure your clients understand that the decision to defer taking Social Security is complex, and taxation is only one variable to consider before making this decision.


Look to Reallocate Assets that Produce Interest Income 

By shifting the investment allocation within a client’s portfolio, you can use interest income sources to help moderate the potential impact of future RMDs.

The way this works is simple. When possible, consolidate income-producing investments inside traditional IRA accounts, and place growth vehicles in personal accounts. If you use interest earned to distribute income from the IRA, the retiree may have the same income as if she were holding the assets in a taxable, or personal, account. Under this strategy, the interest being distributed is part of the RMD instead of in addition to the RMD. At the same time, not only will the portfolio allocated to taxable account have more growth potential, but such growth could be taxed at the lower, long-term capital gains rate rather than at ordinary income rates.


Tax issues are an ongoing, year-round consideration. This is especially true for pre-retirees and retirees. While the best time to give thoughtful, strategic, and actionable advice is often immediately after April 15—when the dust has settled from the previous tax season, and everyone’s mind is clear and ready to focus on the future—it’s not too late to engage these clients in discussions about their current tax strategies and to talk about implementing new ones.


Rick Plum, CFP®, is the chief financial planning officer for Lucia Capital Group (, a family of companies spanning the wealth advice, asset management, and investment distribution spaces. 

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