Life Transitions in Pre-Retirement

Corey is SSN’s in-house consultant on tax planning. He shows advisors how to dig into complex strategies and consider the implications of taxes as clients are getting ready to retire.

Let’s discuss how you can help married couples through different life transitions, starting in pre-retirement, with a focus on the Roth conversion as a way to strategically pay taxes now and avoid them later. Keep in mind that Roth distributions* avoid Federal taxes and are not included in the Social Security tax calculation.

I want you to think about the rules as generally set up so that your average middle-income client is going to pay average taxes and receive average benefits. Our job as planners is to find those situations where we can use those rules to our client’s advantage over their lifetime. We suggest using tax planning software that can help you run multiple scenarios quickly.

Let’s look at 5 transitions and some considerations for Roth conversions:

  1. Both Spouses Working

Let’s start with a scenario in which both spouses are working and are in their prime earning years. I have been seeing more scenarios recently where it makes sense to do Roth conversions even if you have a middle-income client in a 22% or 24% marginal bracket. This is especially true if federal rates rise back to the old brackets in 2026.

  1. One Spouse Retires

Next, we may have scenarios in which there are staggered retirements when one spouse retires before the other. We need to look at several moving parts here and ask some questions:

  • Is the higher earner or the lower earner retiring first?
  • Can the couple survive on just one paycheck and delay Social Security?

If we can get into a situation where taxable income drops, then the clients may be able to convert a considerable amount of assets during those years while in a lower tax bracket.

  1. Both Spouses Retired

Once both spouses are retired, the client is likely to be living on a combination of Social Security and portfolio withdrawals. Here we have some additional considerations:

  • Should we begin taking from a combination of Roth, Non-Qualified and Traditional IRA so we can lower the tax bill?
  • Or does it make sense to continue doing Roth conversions thus creating more tax now so we can save more later and potentially preserve assets for future generations?

Answers to these questions are going to depend on the client situation but having these options and knowing how to use them to the client’s advantage is important before the client has to begin taking Required Minimum Distributions.

  1. RMDs

When clients reach age 70.5, they will be forced to take withdrawals on their Traditional IRAs. They will begin losing some flexibility here so we want to make sure they have made the right moves leading up to this point. It is still possible to do Roth conversions at this point, but it may be more for end-of-life planning or the next generation because of the 5 year holding rule.

  1. Single Status

And finally, we will look at the scenario in which one spouse passes away before the other. The surviving spouse now transitions from a filing status of married to single. There is a reasonable chance that the single client will end up paying much higher federal taxes than the couple was paying due to this change in filing status, so you need to be preparing your clients for that possibility.

The big takeaway here is that you will likely have opportunities in some situations and the loss of flexibility in others. It is up to you to identify those events ahead of time so that you can optimize the client results throughout retirement.

*after age 59.5 held at least 5 years

Stay tuned for more blog posts and other great Tax Savvy Content.

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