Bridge Building and Tax Efficient Distribution Strategies

09 Apr 2018

As a mother of twin girls with active imaginations, I’ve observed quite a few games being concocted over the years. The most recent involved them creating a bridge for their toys to cross a puddle safely. The girls had many tools at their disposal: sticks, rocks, chalk, leaves etc. As expected, bridge building did not go smoothly at first.

They got frustrated, distracted, hungry etc. It’s usually at this point where I offer some help. With a bit of guidance, the girls were able to refocus, form a plan, and make a stable bridge. I’m happy to announce every toy made it safely across the puddle.

Your clients have concocted their own scenarios over the years. As their trusted advisor, you will observe, listen, and ultimately provide guidance for some of their most important decisions; including retirement planning. They will need your assistance navigating the peaks and valleys of their financial future, and the easiest way to help them, is to build a bridge.

Financial advisor and bridge builder

It’s important to look at the structure of your client’s retirement plan. Have you set up their distributions in a manner that will maximize their tax liabilities in order for their retirement savings to last longer? Let’s look at an example:

Below you see the accumulated assets of a couple who plan on retiring at age 65. They have $1.5 million in tax deferred accounts and $100,000 in taxable investments.

Given their current scenario, set up with a pro-rata distribution, it’s likely their taxes in retirement could be very high. As you can see, this is driven by Required Minimum Distributions (RMD) and Social Security.

Smoothing out tax liability

In order to improve this scenario, your clients need a bridge in the form of a Roth Conversion. Smooth out the tax liability by altering the sequence of distributions and leveraging Roth conversions in lower tax bracket years. With this adjustment, your clients could achieve a $1.14 million net gain in tax-adjusted income versus the pro rata withdrawal strategy without Roth conversion.

Guide and advise

Your clients have worked hard to save for their retirement, so help them make the most of their money. Listen to what they have to say, observe their behavior, and offer assistance and guidance whenever possible. Help them understand their options by reviewing the differences between the three typical retirement drawdown strategies.

Then, review different tax efficient distribution scenarios with them in a financial planning software like RightCapital so they can see firsthand where there is room for opportunity. Our intuitive and easy to use platform makes it easy to show your clients how you can help them make their retirement savings last longer!

Not sure how to talk to your clients about Tax Efficient Distribution Strategies? Download our Conversation Kickstarter for tips on how to start the conversation!

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