As The Retirement Guys, one of the most common things we deal with on a day-to-day basis is our clients’ retirement accounts. Growing their account is an important focus, but many of our clients have reached a different phase of their lives and now we must adjust our thinking to best handle the “distribution phase” of the retirement account.

As we reach the distribution phase, a big issue to consider with your retirement accounts is taxation. Keep in mind that if you have a traditional IRA or 401(k) or 403(b), the money that in these accounts has never been taxed. They have done their job and been great tools to help you grow retirement money on a tax-favored basis. The government has allowed you to defer paying taxes for years and years and doesn’t require you to start paying taxes until age 70-and-a-half if you choose to wait that long.  Then you are only required to take an RMD (required minimum distribution) and pay tax only on what you take out. This RMD is calculated based on your life expectancy and how much is in your account.  The IRA guru Ed Slott, who has written several books on the subject, calls the retirement account the “tax ticking time bomb.”  This tax time bomb is going to go off at some point unless steps are taken to diffuse it.

This tax time bomb can have an effect in a couple of different ways.  First, if the account holder needs to draw on your retirement savings to provide enough income for retirement, you will feel the effects of the money being taxed as you withdraw it for your everyday needs.  Secondly, if you do not need to use the money yourself, it can be a huge bomb that goes off when it is passed on to your children or grandchildren.  The good news is that if you choose to, you can do something about it.

Let’s talk about what you could do if you need the money for retirement. The government has come up with this wonderful thing know as the Roth IRA.  After tax money goes in, and when you draw it out, all of the growth comes out tax-free.

The problem is you have this large account that is all taxable. Uncle Sam says that if you want to, you could convert it to a Roth IRA. The rub is that you have to pay taxes on whatever you convert.  To determine if this is a good idea, an analysis should be done.  It may make sense to convert in steps.  We like the idea of putting money in several different buckets.  If one particular bucket works out great, go ahead and convert it.  If the other buckets do not work out the way you hoped, the government gives you a “do-over” called re-characterization.

Wouldn’t it be nice to have the peace of mind knowing that you can go out and spend your money as you please and enjoy life and at the same time know you are leaving a significant amount of money behind to your children or grandchildren? A good estate plan can accomplish this. Take action and get it in place right away.

Got a question for The Retirement Guys?  Send your e-mails to letters@toledofreepress.com or you can reach them by calling (419) 842-0550. Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC.  The Retirement Guys are not an affiliate of NEXT Financial Group. Their office is located at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537.

Tags: Retirement Guys

This entry was posted on Friday, May 21st, 2010 at 12:00 am and is filed under Retirement Guys, Toledo Business Link.
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