How to Manage Retirement Account Withdrawals in Wealth Planning
IInvestors are often programmed to think that it’s almost never a good idea to make early withdrawals from a retirement account. It is the role of the advisors to help them understand when it might make sense to take the funds and accept the tax liability.
In these scenarios, advisors often recommend that their client switch to a Roth IRA and pay the tax up front upon conversion.
But awareness is growing of an alternative solution: a “stretchable annuity”. This is an expanded use of a Private Placement Variable Annuity (PPVA), and it can allow Ultra High Net Worth (UHNW) families with large retirement accounts to defer and stretch the tax bill over multiple generations. .
Early Withdrawal Scenarios for UHNW Families
Early withdrawals from retirement accounts can make sense for clients facing scenarios such as:
- Losses from other assets that could reduce pension plan withdrawal liability
- Desire to do estate planning/wealth transfer planning to transfer/give retirement account assets to successive generations
- Plan to retire or move to a state of residence that has a higher income tax rate than the current state of residence
- Currently in a low income tax year and therefore in a lower tax bracket
- Retirement account values have declined due to the stock market decline in 2022, resulting in lower income tax on the account value
- Do not particularly need or want to withdraw Required Minimum Distributions (RMDs) from Mandatory Retirement Accounts at age 72
Limits of Roth IRAs
While Roth IRAs are generally recommended by advisors for clients facing any of the above reasons for making early withdrawals from retirement accounts, Roth IRAs have limitations that can be particularly troublesome for UHNW planning:
- No possibility of estate planning/wealth transfer/donation to successive generations
- Remaining retirement accounts at death are automatically included in your client’s estate
- Five-year hold period for withdrawals of Roth IRA conversion amounts
- Mandatory withdrawals by heirs
Advantages of the extended pension
On the other hand, an extended pension solution can:
- Be cheap and institutionally priced
- Offer no redemption fees
- Defer and spread the tax bill over several generations
- Offer flexible investment choices
- Create multi-generational wealth planning opportunities
We detailed how an extended annuity can be used for multi-generational estate planning in our last blog.
We are also available to talk with advisors about this innovative use of PPVA. Please contact us with any questions.
Add to this disclosure: For more information, see the Disclosures webpage.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.