Managing Tax-Efficient Withdrawal Strategies for Retirement
Financial professionals may want to consider software that allows them to factor in several key variables, Cordasco suggests: “One argument in favor of tax diversification-related asset location is that it allows retirees the flexibility to respond to a changing tax environment over the course of their retirement. Software that allows for different assumptions regarding future tax rates can be helpful.
“Also, software that allows financial professionals to identify potential income tax issues for beneficiaries can provide opportunities to incorporate those beneficiaries into the planning process, which can lead to building a generational practice.”
Other key considerations Cordasco mentions include understanding how to incorporate individual issues, qualified and nonqualified investments, insurance-based products, health savings accounts, etc., into the program to optimize the combination of minimizing taxes and maximizing income over time. For example, loading both Roth and non-Roth 401(k)/IRA investments and selecting the proper tax impacts on future tax withdrawals is valuable.
“Another example is cash value life insurance,” he adds. “Many of the leading planning software programs allow the user to show the cash value as an asset and source of income, which of course comes with its own unique taxable/non-taxable considerations.
‘’Once the assets are captured and properly ‘located’ or classified for tax purposes, the financial professional is in position to begin the income sequencing needs analysis across the complete portfolio. Of course, the right strategy will depend upon the client’s unique needs and tax advice must come from a tax professional.”
As a practical example, he cites managing modified adjusted gross income, or MAGI, which among other considerations affects Medicare Part B premiums, which in turn can impact Social Security benefits. As MAGI increases, Medicare Part B premiums, which are predicated upon a sliding scale, can increase as well. This in turn may reduce the client’s Social Security benefit because Medicare Part B premiums are paid for from the client’s Social Security benefit.
“With an eye on managing MAGI, the financial professional who is monitoring their clients’ income needs and potential taxation levels can tap into the planning software to identify which of their income sources may provide income not included in the MAGI calculation,” he explains. “This provides the FP with the opportunity to meet the income need, reducing both the client’s Medicare Part B premium and income-related taxes.”
