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Helping Clients Make the Most of Their IRA Distributions

Helping Clients Make the Most of Their IRA Distributions

Ultimately, advisors need to change the mindset of their clients, who increasingly should be thinking about when they can take IRA distributions, not when they have to.

It’s that time of year again. With April 15 fast approaching, everyone is looking for ways to make their tax bills more efficient. And while tax mitigation strategies are a vital component of nearly every financial plan, if you are just now beginning to engage your clients about last year’s taxes, it may be too late. This is a discussion that should have happened long ago, and financial advisors can likely do little at this point to effect meaningful change for 2014 tax returns.

Instead, financial advisors should use this time to meet with their clients and focus on longer-term tax strategies. This is especially important for those clients who are nearing or already in retirement. In part, this means dispelling what may be one of the biggest and most persistent retirement myths among the media, investors, and even some advisors: never take IRA distributions until you absolutely have to.

According to this conventional wisdom, this ostensibly means waiting until the year you reach age 70 ½, when the federal tax code mandates that individuals must take a required minimum distribution (RMD). The reality, however, is much different. From a financial planning perspective, in many cases it makes sense to draw down or convert money from an IRA well before that age.


Shuffle the Deck

If individuals have other income-producing assets in retirement, RMDs (which in the first year are typically just under 4% of the total IRA balance) often serve to push them into a higher tax bracket. One way to combat this may be to simply rearrange an individual’s investment portfolio.

It’s common for investors to silo their holdings, keeping their income-oriented investments (such as bonds, real estate investment trusts, or annuities) in their personal accounts while holding growth-oriented assets (such as stocks) in their retirement accounts. But as investors retire and near age 70 ½, they should revisit this approach and consider making changes to their portfolio. Otherwise, they could face tax bills that escalate significantly as they age.


Consider the following two scenarios: [i]

  • In the first scenario, a typical retiree and his spouse, both age 62, have a $1 million portfolio split evenly between personal and IRA accounts. Each year, they receive $30,000 in social security benefits and withdraw $20,000 from their IRAs. Adhering to conventional wisdom, these retirees have not touched their IRAs, which (assuming a 9% annual return) could double in size to $1 million by the time they are forced to take their first RMD—an RMD that could be as high as $40,000 (or 4% of the total balance) under this scenario. Combined with the income they receive from distributions, this means their investment income would be $60,000 per year. At that level, much of their social security benefits could also be taxed.
  • In the second scenario, the couple reshuffled their portfolio, swapping the income-oriented investments in their personal accounts with the growth-oriented assets in their IRAs. Due to this seemingly slight—but important—modification, the RMD out of their IRAs would be $20,000 (not $40,000) since it would be based on the total value of their income-oriented investments ($500,000) due to the fact that income generated from these accounts is distributed each year. Importantly, this would also mean that their social security benefits may largely go untaxed because the RMD is not adding to their taxable income.


Spending Out the Tax Bracket

So why don’t all retirees reposition their portfolios in such a manner? Simple—they may not want to pay the taxes it takes to convert their IRAs or reshuffle their assets. Virtually everyone loathes taxes, and paying them before the perceived point of absolute necessity goes against our natural instincts.

But in some instances, it may actually pay to take the near-term tax hit in order to potentially lower—or eliminate—future obligations. As such, financial advisors should have an eye beyond this year’s tax filing deadline and actively look at their roster of clients to determine who may benefit from taking distributions or converting IRAs up to the ceiling of the next marginal tax rate. This practice can also be referred to as “spending out the tax bracket.”

It’s always dangerous to make generalizations, but some investors can still pay tax rates as low as 15% while taking this approach combined with other sensible tax mitigation strategies (like Roth IRA conversions or delaying social security payments when possible). Again, it’s easy to understand why people don’t like taxes, but this rate pales in comparison to what they could otherwise pay were they to make the RMD after their IRA accounts have grown significantly in value.

Ultimately, advisors need to change the mindset of their clients, who increasingly should be thinking about when they can take IRA distributions, not when they have to. They may not want to pay taxes today or even next year, but doing so could end up saving them in the long run. And that’s the essence of long-term financial planning.


Rick Plum is the chief financial planning officer for Lucia Capital Group (, a family of companies spanning the wealth advice, asset management, and investment distribution spaces. Through its subsidiaries and affiliates, Lucia Capital Group oversees approximately $2.0 billion in fee-based, brokerage, fixed insurance, and variable insurance assets. An affiliated partner company of the Firm’s asset management business, Lucia Capital Management, manages The Multi-Strategy Growth & Income Fund (NASDAQ: MSFDX). [ii]


[i] Scenarios are for illustrative purposes only and not meant to predict or guarantee returns of any particular investment. Information presented should not be considered specific tax, legal, or investment advice and is based on understanding of current laws. You should always seek counsel of the appropriate advisor prior to making any financial decision.


Social Security rules can be complex. The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency. For more information about Social Security benefits, visit


[ii] As of December 31, 2014, client assets managed by Lucia Wealth Services, a subsidiary of Lucia Capital Group, totaled $261,807,874 in discretionary accounts and $273,006,546 in non-discretionary accounts. In addition, Lucia Securities, LLC registered representatives oversee $1,254,292,705 of assets in non-discretionary, traditional commission-based accounts. As licensed insurance agents, representatives oversee $146,666,905 in fixed-annuity products. As of December 31, 2014, Lucia Capital Management had $196,218,276 in discretionary assets under management.

Lucia Capital Management, an affiliate of Lucia Securities, LLC, is under common ownership and control with Lucia Capital Group.

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