LEGISLATION
POST-SECURE ACT:
Roth conversions
or life insurance?
Joe Elsasser, CFP
Joe is founder and president of
Covisum, a financial tech company
focused on creating software that
improves lives through better
financial decisions. Covisum helps
financial advisors serving clients
in or near retirement and powers
some of the nation’s largest financial
planning institutions. Contact Joe at
[email protected].
…few people will
complain about having
more money than they
need. However, it’s
important to note that
the excess will be taxed
at the client’s highest
marginal rates.
40
Perspectives
Q2 2020
THE SECURE Act has created some really interesting opportunities for financial advisors who
specialize in retirement income planning, especially when you consider that some of these
changes can cause eventual sub-optimal tax situations for clients. For instance, increasing the
required minimum distribution age to 72 may seem to reduce the tax burden as withdrawals
from IRA accounts could, depending on the client’s birthday, be deferred an extra year
or two. But for clients whose IRAs are over-funded, the change may actually increase the
lifetime tax bill.
Many individuals have oversaved in their IRA/401k accounts such that when they reach the
new RMD age of 72, their RMDs, when combined with other income such as Social Security,
will be more than they need to meet their desired retirement lifestyle. It’s a good problem
to have — few people will complain about having more money than they need. However, it’s
important to note that the excess will be taxed at the client’s highest marginal rates. This is an
issue particularly for those whose retirement straddles one of the larger gaps in rates under
the current tax code for instance those in the 12 to 22% or 24 to32%…, This is also a dilemma
for individuals who face interactions with Social Security benefits, capital gains brackets or net
investment income tax. The tax bite on these additional dollars can be substantially greater
than the tax bite on income that falls into lower brackets.
As a result, tax-savvy advisors generally estimate the client’s cashflows in order to identify
an excess RMD situation and find opportunities to mitigate the eventual problem early in
retirement.
An excess RMD situation may appear like this in a planner’s software. The blue line is the
clients spendable, after tax income need. The green is the spendable income and the red is the
income tax. At age 72, this client will face excess RMDs, but for the first 7 years of retirement is
currently not expected to pay any income tax at all.
Post-Secure Act continued on page 42