Exploring the Mega Backdoor Roth: Is It The Right Strategy For You?

Contributed by: Kelsey Arvai, CFP®, MBA

As financial planning professionals, we often seek advanced strategies to maximize clients’ retirement savings. One such strategy that has gained considerable attention is the Mega Backdoor Roth IRA. But is this complex approach suitable for everyone? In this blog, we’ll explore what the Mega Backdoor Roth is, how it works, and whether it might be a beneficial option for your financial planning strategy.

What is a Mega Backdoor Roth?

The Mega Backdoor Roth IRA is an advanced retirement savings technique that allows high-income earners to contribute more to their Roth IRA than traditional limits permit. Typically, Roth IRA contributions are capped at $7,000 annually for individuals under 50 (or $8,000 for those 50 and older). However, the Mega Backdoor Roth strategy enables individuals to funnel significantly larger amounts into a Roth IRA by leveraging after-tax contributions made to a 401(k) or 403(b) plan.

How Does It Work?

Here’s a step-by-step breakdown of how the Mega Backdoor Roth works:

1. Contribute to Your 401(k) or 403(b) Plan: Start by contributing to your retirement plan up to the annual limit of $23,000 for individuals under 50, or $30,500 for those 50 and older, through pre-tax or Roth contributions.

2. Make After-Tax Contributions: Once you reach the annual pre-tax or Roth contribution limit, you can make additional after-tax contributions to your retirement plan. The total defined contribution limit for 2024 is $69,000, including employee and employer contributions.

3. Convert to Roth IRA: Periodically, or as your plan allows, you can roll over the after-tax contributions and any earnings into a Roth IRA. This conversion avoids taxes on the earnings as Roth IRAs grow tax-free.

Benefits of the Mega Backdoor Roth

• Increased Contribution Limits: The Mega Backdoor Roth allows you to contribute significantly more to your Roth IRA than the standard limits, which can be a substantial advantage for high-income earners seeking to maximize their tax-free retirement savings.

• Tax-Free Growth: Contributions to a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free. This can be particularly beneficial for individuals who expect to be in a higher tax bracket during retirement.

• Flexibility: Roth IRAs offer flexibility in terms of withdrawal options. Contributions (but not earnings) can be withdrawn at any time without penalties or taxes, providing added financial flexibility.

Considerations Before Implementing

While the Mega Backdoor Roth offers compelling advantages, it’s not suitable for everyone. Consider the following factors before deciding if this strategy is right for you:

• Plan Availability: Not all retirement plans permit after-tax contributions or in-service withdrawals, which are necessary for executing the Mega Backdoor Roth strategy. Review your plan’s rules to ensure this option is available.

• Income and Contribution Limits: Ensure you are within the income limits and contribution caps that apply to your situation. The strategy is generally most beneficial for high-income earners who have already maxed out their regular 401(k) and IRA contributions.

• Administrative Complexity: Implementing the Mega Backdoor Roth can involve additional administrative steps and paperwork. Ensure you are comfortable with these requirements or seek assistance from a financial advisor to navigate the process effectively.

The Mega Backdoor Roth IRA is a powerful tool for those looking to significantly boost their Roth IRA contributions beyond standard limits. It offers the potential for substantial tax-free growth and flexible withdrawal options, making it an appealing strategy for high-income earners with the proper 401(k) plan structure. However, it’s important to weigh the benefits against the complexities and ensure they align with your overall retirement planning goals.

If you’re considering the Mega Backdoor Roth strategy, consult with a financial advisor to evaluate whether it fits your financial situation and to navigate the process efficiently. The right strategy can make a significant difference in your long-term retirement savings, and the Mega Backdoor Roth might be just the key to unlocking greater financial growth.

Kelsey Arvai, MBA, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kelsey Arvai, MBA, CFP®, and not necessarily those of Raymond James.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

1099 Details for Tax Season

Contributed by: Nick Defenthaler, CFP®, RICP®

Tax season is in full swing (everyone’s favorite time of year, right?!), and 1099s are in the process of being developed and distributed by investment broker-dealers and custodians. The two most common accounts clients own are retirement accounts (Roth IRAs, Traditional IRAs, SEP-IRAs, etc.) or after-tax investment/brokerage accounts (Joint brokerage account, individual brokerage account, trust brokerage account, etc.). Because retirement accounts and after-tax accounts are vastly different from a tax perspective, the 1099s that are generated will be much different as well. Let’s review the differences.

Retirement Accounts (Traditional IRAs, Roth IRAs, SEP-IRAs, 401k, 403b, etc.)

Retirement accounts produce what’s known as a 1099-R. Yes, you guessed it – the “R” stands for retirement account! Because retirement accounts are tax-deferred vehicles, the IRS only cares about how much was withdrawn from the account and if there was any tax withheld on those distributions (the 1099-R is also accompanied by form 5498, which also shows any contributions to the retirement account). Because of the simplicity and what’s captured on this tax form, I commonly refer to a client’s 1099-R as their “retirement account’s W2”. Because of the tax-deferred nature of retirement accounts, portfolio income such as dividends, interest, and capital gains are completely irrelevant from a tax reporting standpoint. Because these income sources do not play a role within the 1099-R, there’s far less accounting that goes into producing the 1099-R, which means they are released early in the year – typically in late January/early February (around the same time most W2s are produced for those still working).

**Important Tip: For those over 70 ½ that have chosen to utilize the Qualified Charitable Distribution or ‘QCD’ strategy (click here to learn more about QCDs) and gift funds directly from their IRA, please note that not all investment companies will report these gifts on your 1099-R! If the gifts you made from your IRA directly to charity do not appear on your 1099-R, it will be your responsibility (or you can ask your advisor) to communicate how much you’ve gifted throughout the year to your tax preparer to ensure you’re receiving the tax benefits you’re fully entitled to! If gifts are missed, you would be able to file an amended tax return, but this is a time-consuming and sometimes costly step I would recommend avoiding, if possible.**

After-Tax Investment/Brokerage Accounts (Trust accounts, joint accounts, individual accounts, etc.)

After-tax investment or ‘brokerage accounts’ are very different compared to retirement accounts when it comes to tax reporting. Because these accounts are funded with after-tax dollars and not held in a retirement account, there is no tax-deferral. This means that income sources such as dividends, interest, and capital gains are taxable to clients each year – the 1099 produced for these accounts captures this data so your tax preparer can accurately complete your tax return each year. Within the 1099 summary, there are three common sections:

• 1099-Div: Reports dividends paid throughout the year

• 1099-Int: Reports interest paid throughout the year

• 1099-B: Reports capital gains or losses generated throughout the year

Unlike retirement accounts that are tax-deferred, dividends, interest, and capital gains/losses play a significant role within the 1099 because they are reportable on your tax return each year. Because of this, a significant amount of accounting from the various investments within your account is required to ultimately determine these figures that will be captured on your 1099. Because taxes are not withheld in these accounts if distributions ever occur, withdrawals are not captured on these 1099s as they would be on a 1099-R. Given the extensive accounting that occurs to ensure errors are not made on reportable income, the earliest these 1099s become available is typically mid-February. That said, it’s quite common for many 1099s to be distributed closer to mid-March. Because of this, I always recommend consulting with your tax professional to see if filing a tax extension would be appropriate for your situation.

As you can see, there are important differences between these different tax reporting documents. Having a better understanding of each will hopefully make your upcoming tax season a bit more manageable. 

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Important Information for Tax Season 2024

Contributed by: Andrew O’Laughlin, CFP®, MBA

As we prepare for tax season, we want to keep you apprised of when you can expect to receive your tax documentation from Raymond James.

2024 Form 1099 Mailing Schedule

• January 31 – Mailing of Form 1099-Q and Retirement Tax Packages.

• February 15 – Mailing of original Form 1099s.

• February 28 – Begin mailing delayed and amended Form 1099s.

• March 15 – Final mailing of any remaining delayed original Form 1099s.

Additional Important Information

Delayed Form 1099s

In an effort to capture delayed data on original Form 1099s, the IRS allows custodians (including Raymond James) to extend the mailing date until March 15, 2025, for clients who hold particular investments or who have had specific taxable events occur. Examples of delayed information include:

• Income reallocation related to mutual funds, real estate investment, unit investment, grantor and royalty trusts, as well as holding company depositary receipts.

• Processing of original issue discount and mortgage-backed bonds.

• Expected cost basis adjustments including, but not limited to, accounts holding certain types of fixed income securities and options.

If you do have a delayed Form 1099, we may be able to generate a preliminary statement for you for informational purposes only, as the form is subject to change.

Amended Form 1099s

Even after delaying your Form 1099, please be aware that adjustments to your Form 1099 are still possible. Raymond James is required by the IRS to produce an amended Form 1099 if notice of such an adjustment is received after the original Form 1099 has been produced. There is no cutoff or deadline for amended Form 1099 statements. The following are some examples of reasons for amended Form 1099s:

• Income reallocation.

• Adjustments to cost basis (due to the Economic Stabilization Act of 2008).

• Changes made by mutual fund companies related to foreign withholding.

• Tax-exempt payments subject to alternative minimum tax.

• Any portion of distributions derived from U.S. Treasury obligations.

What Can You Do?

You should consider talking to your tax professional about whether it makes sense to file an extension with the IRS to give you additional time to file your tax return, particularly if you held any of the aforementioned securities during 2024.

If you receive an amended Form 1099 after you have already filed your tax return, you should consult with your tax professional about the requirements to re-file based on your individual tax circumstances.

And Don’t Forget…

As you complete your taxes for this year, a copy of your tax return is one of the most powerful financial planning information tools we have. Whenever possible, we request that you send a copy of your return to your financial planner, associate financial planner, or client service associate upon filing. Thank you for your assistance in providing this information, which enhances our services to you.

We hope you find this additional information helpful. Please call us if you have any questions or concerns about the upcoming tax season.

Andrew O’Laughlin, CFP®, MBA; is the Director of Client Services at Center for Financial Planning, Inc.® He has the CERTIFIED FINANCIAL PLANNER™ certification.

Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

2025 Retirement Account Contribution and Eligibility Limits Increases

Contributed by: Robert Ingram, CFP®

The IRS has recently announced the annual contribution limits for retirement plans and IRA accounts in 2025. And while the increases to most of the limits are modest, there are some notable increases. In particular, the legislation Setting Every Community Up for Retirement Act of 2022 (SECURE Act 2.0) adds some special contribution limits starting in 2025. Here are some of the adjustments to contribution limits and income eligibility limits for some contributions that you should keep on your radar as you plan your savings goals and targets for the New Year.

Employer retirement plan contribution limits (401k, 403b, most 457 plans, and Thrift Saving):

• $23,500 annual employee elective deferral contribution limit (increases $500 from $23,000 in 2024)

• $7,500 extra "catch-up" contribution if age 50 and above (remains the same as in 2024)

• Total amount that can be contributed to a defined contribution plan, including all contribution types (e.g., employee deferrals, employer matching, and profit sharing), will be $70,000 or $77,500 if age 50 and above (increased from $69,000 or $76,500 for age 50+ in 2024)

*SECURE Act 2.0 contribution limit change

Under a change made in SECURE ACT 2.0, starting in 2025, there will be a higher catch-up contribution limit for employees aged 60, 61, 62, and 63 who participate in the above plans.

• $11,250 is the "catch-up" contribution for those aged 60, 61, 62, and 63  ($3,750 more than the age 50 and above "catch-up" amount)

Traditional, Roth, SIMPLE IRA contribution limits:

Traditional and Roth IRA

• $7,000 annual contribution limit (remains the same as in 2024)

• $1,000 “catch-up” contribution if age 50 and above (also remains the same as in 2024)

Note: The annual limit applies to any combination of Traditional IRA and Roth IRA contributions. (i.e., You would not be able to contribute up the maximum to a Traditional IRA and to up the maximum to a Roth IRA.)

SIMPLE IRA

• $16,500 annual elective contribution limit (increases $500 from $16,000 in 2024)

• $3,500 “catch-up” contribution if age 50 and above  (remains the same as in 2024)

*SECURE Act 2.0 also sets a higher “catch-up” contribution limit to a SIMPLE for those aged 60-63)

• $5,250 “catch-up” contribution if aged 60, 61, 62, and 63 ($1,750 more than the age 50 and above “catch-up” amount)

Traditional IRA deductibility (income limits):

You may be able to deduct contributions to a Traditional IRA from your taxable income.  Eligibility to do so depends on your tax filing status, whether you (or your spouse) is covered by an employer retirement plan, and your Modified Adjusted Gross Income (MAGI). The amount of a Traditional IRA contribution that is deductible is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For example,

• Filing Single

  • You are covered under an employer plan

    • Partial deduction phase-out begins at $79,000 up to $89,000 (then above this no deduction) compared to 2024 (phase-out: $77,000 to $87,000)

•  Married filing jointly

  • Spouse contributing to the IRA is covered under a plan

    • Phase-out begins at $126,000 to $146,000 compared to 2024 (phase-out: $123,000 to $143,000)

  • Spouse contributing is not covered by a plan, but the other spouse is covered under a plan

    • Phase-out begins at $236,000 to $246,000 compared to 2022 (phase-out:  $230,000 to $240,000)

Roth IRA contribution (income limits):

Similarly to making tax-deductible contributions to a Traditional IRA, being eligible to contribute to a Roth IRA depends on your tax filing status and your income. Your allowable contribution is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range. For 2025, the limits are as follows:

• Filing Single or Head of Household

  • Partial contribution phase-out begins at $150,000 to $165,000  compared to 2024 (phase-out:  $146,000 to $161,000)

•  Married filing jointly

  • Phase-out begins at $236,000 to $246,000 compared to 2023 (phase-out: $230,000 to $240,000)

If your MAGI is below the phase-out floor, you can contribute up to the maximum. Above the phase-out ceiling, you are ineligible for any partial contribution.

Eligibility for contributions to retirement accounts like Roth IRA accounts also requires you to have earned income. If you have no earned income or your total MAGI makes you ineligible for regular Roth IRA contributions, other strategies such as Roth IRA Conversions could be good alternatives in some situations to move money into a Roth. Roth Conversions can have different income tax implications, so you should always consult with your planner and tax advisor when considering these types of strategies.

As always, if you have any questions surrounding these changes, don’t hesitate to contact us!

Have a happy and healthy holiday season!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Any opinions are those of Bob Ingram, CFP® and not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Three Financial Planning Questions for Small Business Owners

Contributed by: Lauren Adams, CFA®, CFP®

One of the most rewarding types of clients we have the honor of working with are business owners. These folks have built their companies from the ground up across a wide variety of industries or worked their way up through the ranks to now serve at their company’s helm. They are masters of their fields of expertise and savvy strategists. However, they are often frustrated when their expertise in their domain doesn’t translate into know-how to manage their finances. This is why many choose to outsource the management of their finances to professionals. If you are a business owner devoted to your business and perhaps putting your own planning on the back burner, we’ve put together a few questions for you to consider.  

1. Are you optimizing your retirement savings?

Two of the most popular retirement savings vehicles for small business owners are the SEP (Simplified Employee Pension) IRA and the solo 401(k).

SEP IRAs are one of the most common retirement accounts for self-employed individuals and small business owners; they are popular for their simplicity and flexibility. They are similar to traditional IRAs in many ways but with some twists. With a SEP IRA, you can most likely contribute much more than a traditional IRA. Depending on your business entity structure, a business owner’s limit is generally the lesser of 25% of compensation (up to $69,000 in 2024). These accounts tend to be ideal for folks who have very few (or zero) other employees because owners must contribute proportional amounts for each eligible employee.

SEPs also offer a lot of flexibility: you can freely roll over the account into a Traditional IRA in the future, and you can make contributions until your taxes are due the following year. Some limitations to consider: you don’t have the ability to take a loan from your SEP IRA (like you can from a 401(k)), there is no Roth contribution option with SEPs (contributions will always be tax deductible up front and withdrawals will always be taxed when taken out), and typically the self-employed person would need to earn a lot to be able to max out their annual contribution limit ($300k+ in 2024).

Solo 401(k)s are a simplified version of the popular corporate 401(k) savings plan. They might be a fit for owner-only businesses whose only employees are the owner or the owner and spouse. With solo 401(k)s, the owner gets to decide how much to contribute as the employee and the employer. Contributions can be pre-tax or Roth, and 401(k)s do allow for tax-free loans (if the proper procedure is followed). There are some nuances to the employee and employer contribution limits, but solo 401(k)s have the same high contribution rate as SEP IRAs, and typically, you can get there faster (with an overall lower level of total compensation) than the SEP. A downside of solo 401(k)s is that they have some added cost and complexity. Plan documents need to be established, and the IRS requires owners to file a Form 5500 if it has $250,000 or more in assets at the end of the year.

Luckily, these are both great savings options for business owners to build long-term retirement savings and diversify the wealth they are building inside their businesses. We have experience assisting our business owner clients with both types of plans.

2. Are you taking advantage of the QBI deduction?

The qualified business income (QBI) deduction is a potential 20% deduction for self-employed individuals and owners of pass-through entities like LLCs, partnerships, and S corps that was created by the 2017 Tax Cuts and Jobs Act. There is a threshold and phaseout of this deduction if you make too much money, and the rules and calculations around it are complex. We won’t get into the nitty-gritty here, but we want to ensure it is on our business owner clients’ radar. In our experience, many business owners are not aware of this deduction, or they may be paying themselves too high a salary than legally necessary (thus increasing their FICA taxes and limiting their profits and the amount of the potential deduction they are eligible for).

Also, this benefit is scheduled to sunset on December 31, 2025 (unless Congress votes to extend it). So you want to make sure you’re making the most of it while you can, as it can translate into potentially large tax savings under the right circumstances. Don’t wait – call your CPA today and discuss ways you can maximize this benefit while it is still around.

3. Are you planning for the future?

As business owners ourselves, we understand how easy it is to get caught up in working “in” the business instead of “on” the business. That’s why we’ve found helpful tools like Gino Wickman’s Traction and the EOS Resources (https://www.eosworldwide.com/). Dedicating time to work on the business itself can pay dividends in your own quality of life and the equity value of the business itself.

If you are contemplating a sale in the future, don’t assume that you need to wait until after you cash out to call a financial advisor. We can employ many tactics leading up to your business sale (such as tax-loss harvesting strategies like direct indexing or tax-advantaged charitable giving) to help mitigate the tax bite of this watershed moment in your life.  

We hope these questions have helped get you thinking about some opportunities you might be missing and showcase how important prioritizing your own financial planning can be. Reach out to talk through your personal situation together. We’d love to help!

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Lauren Adams, CFA®, CFP® and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The Widow’s Penalty: Lower Income, Higher Taxes

Contributed by: Nick Defenthaler, CFP®, RICP®

A newly widowed example client, whom we'll call "Judy," receives communication from Medicare that her Part B and D premiums are significantly increasing from the prior year. To make matters worse, she also notices that she's now in a much higher tax bracket when filing her most recent tax return. What happened? Now that Judy's husband is deceased, she is receiving less in Social Security and pension income. Her total income has decreased, so why would she have to pay more tax and Medicare premiums? Unfortunately, she's a victim of what's known as the "widow's penalty."

Less Income and More Taxes. What Gives?

Simply put, the widow's penalty is when a surviving spouse ends up paying more taxes on less income after the death of their spouse. This happens when a widow or widower starts filing as a single filer the year after their spouse's death.

When the first spouse dies, the surviving spouse typically sees a reduction in income. While the surviving spouse will continue to receive the greater of the two social security benefits, they will no longer receive the lower benefit. In addition, it's also very likely that the surviving spouse will either entirely or partially lose income tied only to the deceased spouse (ex., employment income, annuity payments, or pensions with reduced or no survivor benefits). Depending on how much income was tied to the deceased spouse, the surviving spouse's fixed income could see a sizeable decrease. At the same time, the surviving spouse starts receiving less income, and they find themself subject to higher taxes.

With some unique exceptions, the surviving spouse is required to start filing taxes as single instead of as married, filing jointly in the year following their spouse's death. In 2024, that means they will hit the 22% bracket at only $47,150 of taxable income. Married filers do not reach the 22% bracket until they have more than $94,300 of income. To make matters worse, the standard deduction the widow will receive will also be cut in half. In 2024, for a married couple (both over 65), their standard deduction will be $32,300. A single filer (over the age of 65) will only have a $16,500 deduction! Unfortunately, even with less income hitting the tax return, widowed tax filers commonly end up paying higher taxes due to the compression of tax brackets and the dramatic standard deduction decrease for single filers.

Medicare Premiums Increase

Tax brackets are not the only place surviving spouses are penalized. Like the hypothetical example above, many surviving spouses see their Medicare premiums increase even though their income has decreased because of how the income-related monthly adjusted amount (IRMAA) is calculated (click HERE to visit our dedicated Medicare resource page). Whereas there is no surcharge until a married couple filing jointly reaches an income of $206,000, single filers with a modified adjusted gross income (MAGI) of more than $103,000 are required to pay a surcharge on their Medicare premiums. This means that a couple could have an income of $127,000 and not be subject to the Medicare IRMAA surcharge. However, if the surviving spouse now has income over $106,000, their premium will increase by almost $1,000 per year. In this same example, the widow could now be in the 22% bracket (as compared to the 12% bracket with $120k of income filing jointly) and be paying approximately $3,600 more in federal tax.

Proactive Planning

Short of remarrying, there is no way to avoid the widow's penalty. However, if your spouse has recently passed away, there may be some steps you can take to minimize your total tax liability.

For most widows, the year their spouse dies will be the last year they will be allowed to use the higher married filing jointly tax brackets and standard deduction. In some cases, it can make sense to strategically realize income during the year of death to minimize the surviving spouse's lifetime tax bill. A surviving spouse might do this by converting savings from a Traditional IRA to a Roth IRA while they are still subject to the married filing jointly rates.

Let's look at a hypothetical scenario with a couple we'll call John and Mary. After several years in a long-term care assisted living facility, John sadly passed away at age 85. Because John and Mary did not have long-term care insurance, they had sizeable out-of-pocket medical expenses that resulted in a significant medical deduction in the year of John's passing. Several months after her husband's passing, over $100,000 was converted from her IRA to a Roth IRA. Because this was the last year she could file jointly on her taxes and had the significant medical deduction for the year John passed, Mary only paid an average tax rate of 10% on the $100,000 that was converted. As we stand here today, Mary would now be filing single and find herself in the 24% tax bracket (which will likely increase to 28% in 2026 as our current low tax rates expire at the end of 2025).

The widow's penalty should be on every married couple's radar. It's possible that while both spouses are living, their tax rates will always remain the same, as we've highlighted above. Unless both spouses pass away within a very short period of time from one another, higher taxes and Medicare premiums are likely inevitable. However, proper planning can help dramatically reduce the impact of this penalty on your plan.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

These examples are hypothetical illustrations and are not intended to reflect any actual outcome. they are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

You've inherited an IRA – Now What?

Contributed by: Kali Hassinger, CFP®, CSRIC®

Receiving an inheritance can be confusing and filled with mixed emotions. However, when inheriting a traditional IRA, the confusion can be compounded by the multitude of rules, regulations, and tax implications surrounding these accounts. How you manage the account in the future can depend on several factors, such as your relationship with the deceased and the age of the deceased at death.

You've Inherited an IRA from your Spouse

If you inherited an IRA from your spouse, and you are the sole beneficiary, you have several options on how to manage the account in the future. The first option is to simply allow the account to remain in your deceased spouse's name.  In this example, if your spouse hadn't yet reached RMD or Required Beginning Date age (as of right now, this is age 73, but it has changed several times in the last few years), you wouldn't need to begin taking Required Minimum Distributions (RMDs) until your spouse would have reached age 73. With this process, you will have additional elections to make regarding which life expectancy table will be used to determine your RMDs.

Spouses can also transfer the account assets into their own traditional IRA. This option is specific to spouses only. With this election, the account is treated no differently than an IRA established in your name. Required Minimum Distributions would not begin until your RMD age. 

However, if you want to access the funds earlier than 59.5 without a 10% tax penalty, it could make more sense to open a beneficiary IRA. This account will be subject to annual required distributions, but again, without a tax penalty.

You've Inherited an IRA from Someone Else

If you recently (since 2020) inherited an IRA from someone else, such as a parent, aunt, or uncle, and as long as they were more than ten years older than you, you will likely need to open an inherited IRA and distribute the entire account within ten years!

If the deceased was subject to Required Minimum Distributions before their death, you must also take an RMD each year (Note: This requirement has been waived in recent years but is set to begin in 2025.) Given that traditional IRA withdrawals, whether inherited or not, are subject to ordinary income tax, this can create significant tax implications for beneficiaries. Purposeful tax planning is essential to avoid unforeseen or forced distributions in later years.

The options discussed here are certainly not exhaustive, and rules differ for beneficiaries who are disabled, chronically ill, minors, or entities (as opposed to individuals). These differing rules also apply to instances in which the beneficiary is less than ten years younger than the deceased account holder.

If you've inherited an IRA and are looking for guidance on which option or planning path is best for you, we are here to help.

Kali Hassinger, CFP®, CSRIC® is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC® and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Top 5 Tips for Managing Beneficiary Selections

Contributed by: Nick Defenthaler, CFP®, RICP®

Checking your beneficiary designations each year on your investment accounts is always a wise move. Our team does this before each planning meeting with our clients, and I can't tell you how many times this has prompted an individual or family to make a change. As tax law has continued to evolve and new rules related to inherited retirement accounts have emerged, it's now even more important to be intentional with your beneficiary selections.

Here are my top five tips and considerations when it comes to prudent beneficiary management and selection:

1. Review Beneficiary Elections Annually

As we all know, mistakes happen, and life changes. Kids might now be older and more responsible for making financial decisions, family members you've listed may have passed away, and dear friends you've named as a beneficiary might no longer be part of your life. Let’s look at a hypothetical investor who we’ll call “Sam”. Sam is in his early 70s and had become divorced three years prior. Sam was also less mobile and, as a result, decided he wanted to hire a new adviser who was closer to his home.

His former wife had been named on his retirement account, which had grown to $1M. If Sam didn't take any action of the time of his divorce, his account would go to his ex-wife, and not his two children as he wants. When we identify a beneficiary that needs to be updated, we make sure the client addresses it immediately as that determines who gets that account.

2. Charitably Inclined? Consider Pre-Tax Retirement Accounts

If you have the desire to leave a legacy to charity, naming the charity as a partial or 100% primary beneficiary on a retirement account could be a very smart tax planning move. Unlike an individual, when a charitable organization receives assets from an individual's pre-tax IRA, 401k, etc., the charity does not pay tax on those dollars. Let’s look an at example client who owns a pre-tax traditional IRA ($1M) and a Roth IRA ($500k). She indicates that she wants 10% of her $1.5M portfolio to go to her church, with the remaining amount being split evenly amongst her four adult children.

To accomplish this goal, we’ll name her church as a beneficiary on her traditional IRA for a specific dollar amount of $150,000. The entire bequest would come from the traditional IRA and nothing from her Roth IRA. This amount could be adjusted as needed. By specifically naming the IRA as the account to fund her charitable bequest, more of her Roth IRA will ultimately go to her kids. If the charity received proceeds from her Roth IRA upon death, the charity would still receive the assets tax-free, so it would be foolish to not have more of these assets go to her kids. Assuming each child is in the 25% tax bracket, this move helped to save her estate almost $38,000 in tax.

3. Naming a Trust? Understand the Ramifications

It is common for clients to name their trust as either the primary or contingent beneficiary of their retirement account. However, when naming a trust, it's important to understand the tax ramifications. Irrevocable trusts aren't used as often as revocable living trusts but have a place in certain cases. While irrevocable trusts typically offer a high level of control, the tax rates for these trusts upon the death of the original account owner are much higher than individual rates with much less income.

Revocable living trusts are the most common trusts we see with a client's name listed as a beneficiary (primary or contingent). However, the correct language must be used within the trust to ensure tax-efficient distributions for the beneficiaries of the actual trust (ex., 'see through' trusts). As always, be sure to consult with your attorney on this matter. Our team always wants to collaborate with your attorney and other professionals on your financial team to ensure the right strategy is in place for you and your family.

4. Beneficiaries in Different Tax Brackets: How to Choose

In addition to intentionally identifying which account would be best served to go to a charity, the same rule applies to individuals who find themselves in very different tax brackets. Let's look at a family we'll call the 'Jones Family' as an example. Mrs. Jones is recently widowed and is in her early 80s. She has two adult children: Ryan (51) and Mark (55). All of them reside in Florida, where there is a 0% state income tax. Mrs. Jones' current portfolio value sits at just shy of $1.1M, allocated as follows: $575,000 in a traditional IRA, $300,000 in a Roth IRA, and $200,000 held in an after-tax brokerage account. Her youngest son, Ryan, finds himself in the 12% federal tax bracket, while her older son, Mark, is in the 35% tax bracket. While Mrs. Jones still wants her estate to be split 50/50 between Ryan and Mark, she wants to make sure the least amount of income tax is paid over time on the inheritance her boys will be receiving. To accomplish this goal, we structure her beneficiary designations as follows:

• Ryan: 100% primary beneficiary on traditional IRA (Mark 100% contingent).

• Mark: 100% primary beneficiary on Roth IRA and after-tax brokerage account (Ryan 100% contingent on both accounts).

• Ryan would be subject to Required Minimum Distributions (RMDs) from the Inherited traditional IRA from his mother, and the account must be depleted in 10 years. However, he would only pay 12% in tax on these distributions. If we assume he stays in this bracket for the next decade, Ryan will end up with $506,000 net of tax [$575,000 x .88 (1 – 12% tax rate)] from the account.

• Being that Mark is in a significantly higher tax bracket, it would be much more tax-efficient for him to inherit his mother's Roth IRA and after-tax brokerage account. While Mark's Inherited Roth IRA will also carry an annual RMD and must be depleted in 10 years, the RMDs he would be taking would NOT be taxable to him. The after-tax brokerage account would also receive what's known as a 'step-up' in cost basis upon Mrs. Jones' death, thus eliminating any large, unrealized capital gains she had in several meaningful stock positions in her account.

While there is never a 'perfect' beneficiary plan, the one outlined above accomplishes Mrs. Jones' goal in the best way possible. If we had named Ryan and Mark as 50% beneficiaries on each account, the total tax burden on the overall inheritance would have been $66,000 higher, primarily due to Mark paying a much higher tax rate on the RMDs from the traditional IRA. Our plan gives Ryan and Mark' net' the same amount. This means more of Mrs. Jones' estate is staying with her family, and a lot less will be going towards tax.

5. End of Life Tax Planning Strategies

As clients age in retirement, they may spend less money and/or incur large medical costs that would result in significant tax deductions. If the owner of a traditional IRA or 401k finds themselves in this situation, they should closely evaluate completing Roth IRA conversions (full conversions, a single partial Roth conversion, or partial conversions over the course of several years).

When converting funds from a traditional IRA to a Roth IRA, the converted funds are considered taxable income. In general, a conversion only makes sense if the rate of tax paid today on the conversion will be less than the tax rate on distributions in the future (either by the current account owner or a future beneficiary). If an individual or family is spending much less and is now well within the 12% bracket, it could make sense to complete annual Roth conversions to completely 'fill up' this low bracket. Another common occurrence that clients might experience is large medical deductions. Unfortunately, these tax deductions ultimately either go to waste or are greatly diminished because there is not enough taxable income to offset the deduction. I have seen scenarios where clients could have converted $30k+ to a Roth IRA completely tax-free due to a large medical deduction. However, the deduction essentially went to waste because no income was generated on the tax return for this deduction to offset. In a sense, this is like striking a match to free 'tax money'. Keep in mind that inherited IRAs cannot be converted to one's own Roth IRA or an Inherited Roth IRA, so exploring conversions during the original account owner's life is imperative. Roth conversions will not make sense for everyone, but when they do, the potential tax dollars saved can be massive.

Naming beneficiaries and having a clear understanding of how you would like funds allocated is step one. Once this is known, the job is usually not complete. A quality adviser who has extensive knowledge of tax planning should be able to offer guidance on how to accomplish this goal in the most tax-efficient manner possible. As mentioned previously, collaboration with other professionals on the client's financial team (ex., CPA and attorney) is ideal. Doing so could allow more of your hard-earned money to stay in the pockets of those you care most for and less going to the IRS!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Center for Financial Planning, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services Investment advisory services are offered through Center for Financial Planning, Inc. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Defenthaler, CFP®, RICP® and not necessarily those of Raymond James.

Raymond James and its advisers do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

These examples are hypothetical illustrations and are not intended to reflect any actual outcome. they are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

Can You Move Required Distributions from Your Tax-Deferred Retirement Plan or IRA to Your Roth IRA?

Contributed by: Kelsey Arvai, CFP®, MBA

Contributed by: Nick Errer and Ryan O'Neal

Required Minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your Traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after December 31st, 2022, or 75 if you were born after 1960).

Account owners in a workplace retirement plan (for example, a 401(k) or profit-sharing plan) can delay taking their RMDs until the year they retire unless they own 5% of the business sponsoring the plan.

These amounts vary depending on the value of your account and your life expectancy factor. The amount of your Required Minimum Distribution (RMD) is calculated by dividing the value of your account value at the previous year's end by a life expectancy factor, as determined by the Internal Revenue Service (IRS). If the sole beneficiary of your IRA is your spouse and your spouse is ten years younger than you, use the life expectancy table from Table II (Joint Life and Last Survivor Expectancy).

For the 2024 tax year, the annual contribution limit to an IRA is $8,000 if you're 50 and older. The limit is the total of all your IRAs – traditional and Roth. (The limits are $1,000 less for anyone under age 50). The IRS requires you to have enough earned income to cover your Roth IRA contributions for the year – but the actual source of your contribution need not be directly from a paycheck. The IRS defines Earned income as any income from wages, salaries, tips, and other taxable employee pay, including self-employment income. However, the IRS does not regulate the pool of money from which the contribution comes. This means you can take your RMD from a Traditional IRA, pay the taxes, and reinvest into your Roth IRA. The only catch is that you would need enough earned income to cover the contribution, but not too much, so you are over the contribution threshold.

The Roth IRA contribution rules are based on your income and tax-filing status. If your modified adjusted gross income (MAGI) is in the Roth IRA phase-out range, you can make a reduced contribution. You can't contribute if your MAGI exceeds the upper limits for your filing status. If your RMD was $8,000 or less, you could deposit all the money into your Roth IRA; however, if you contributed $4,000 to another IRA in the same year, you could just place $4,000 of your RMD into a Roth IRA.

Just because you can, doesn't mean you should… 

It is important to remember that no method is perfect for every individual and there are important factors you should consider before reinvesting RMD income into a Roth IRA. Any contribution to a Roth IRA must be held in the account for a five-year period to avoid a 10% early withdrawal penalty. Additionally, converting RMDs to a Roth IRA is not the only reinvestment vehicle you have. Other options include Roth Conversions, 529 Contributions, and Qualified Charitable Distributions. Talk to a financial advisor today to find a solution that works best for you. Reach out to us here or call us at 248-948-7900.

Sources:

• https://www.investopedia.com/ask/answers/08/ira-rmd-reinvest.asp

• https://smartasset.com/retirement/planning-to-take-rmds-convert-to-roth-why-not

• https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

• https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs#:~:text=The%20RMD%20rules%20apply%20to,while%20the%20owner%20is%20alive.

Kelsey Arvai, MBA, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

Beat the Squeeze: ACA Income Planning for Pre-Medicare Retirees

Contributed by: Nick Defenthaler, CFP®, RICP®

Are you currently retired or planning on retiring before Medicare begins at age 65? If so, congratulations! If you have the ability to retire in your early 60s, chances are that you’ve saved aggressively over the years and have prepared well for retirement. In our experience, the top concern or area of stress for those retiring before 65 is the potential cost of health insurance and the impact it could have on their long-term financial plan.

Prior to the Affordable Care Act (ACA), private health care for those in their early 60s could be rigid and very expensive. Since the ACA was signed into law in 2010, a lot has changed. While certainly not perfect, the ACA now allows individuals to obtain private health insurance, the premiums of which are based on their current or projected income for the upcoming year.

If your income is within a certain percentage of the federal poverty level, you will receive a subsidy on your monthly health insurance premiums. Through recent legislation, these income parameters have substantially expanded, now benefiting individuals and couples with income levels that would previously disqualify them from receiving any subsidy on their health insurance premiums.

Open enrollment for ACA plans typically runs from early November until mid-January. When applying for coverage, you must estimate your income level for the upcoming year. From this information, your potential subsidy is determined.

If your actual income level is higher than projected, you will have to pay back a portion (or potentially all) of your subsidy. Your payback amount will depend on how much higher your income is as compared to your original projection. This determination occurs when you file your taxes for the year. On the flip side, if your income is lower than initially projected, you’ll be entitled to the higher subsidy amount you should have received all along (once again, determined when you file your taxes and received as a tax credit).

If you are someone who has saved very well in preparation for your retirement, you likely have various forms of retirement/investment accounts as well as future fixed income sources, which create retirement income flexibility for you. This flexibility makes it possible to structure a “retirement paycheck” that assures your spending needs are met but with significantly less income reported on your tax return. We call this “ACA income planning,” and it allows you to structure your income in a way that could help save you tens of thousands of dollars in reduced health insurance premiums! Read on as we dive into the details of the key elements of ACA income planning to see if this concept could make sense for you.

Overview of Income Sources

As discussed above, the premiums you pay for pre-65 health insurance are based on your projected modified adjusted gross income (MAGI) for the upcoming year. Because of this, it’s important to understand what constitutes as income in the first place:

• Employment/Earned Income: Will generally be 100% included in your MAGI for the year.

• Pension Income: Will generally be 100% included in your MAGI for the year.

• Social Security: While you may not pay tax on your full Social Security benefit, your ENTIRE monthly benefit (taxable and non-taxable component) is included in your MAGI for ACA income determination purposes.

• Traditional IRA/401(k)/403(b) Distributions: Because these retirement accounts were funded with pre-tax income, distributions will generally be 100% taxable and included in MAGI.

• Roth IRA Distributions: Because this retirement account was funded with after-tax dollars, distributions will NOT be taxable or included in MAGI (certain rules such as attaining age 59 ½ and having the Roth IRA open for at least five years will come into play, however).

• After-Tax Investment or “Brokerage” Account: Unlike 401(k) or Roth IRAs, these accounts are not tax-deferred and were initially funded with after-tax dollars. Capital gains, dividends, and interest (even tax-free, municipal bond interest) produced by the investments within this account will be included in MAGI. However, funds withdrawn from this account that have previously been taxed (the cost basis) will NOT be included in MAGI.

• Cash: Similar to an after-tax investment/brokerage account, funds initially deposited into a cash account, such as checking or savings, have already been taxed. Because of this, when funds are withdrawn from your checking/savings account for spending, these dollars are NOT included in MAGI.

• For even more details on various income sources and how they can impact MAGI, please click HERE.

Intentional Distribution Strategy

Because drawing from different accounts will have drastically different tax consequences, it is imperative to have a sound retirement income plan in place while on an individual health care plan before Medicare.

Consider a retired married couple in their early 60s who have saved into other accounts besides 401(k)s or IRAs (e.g., Roth IRAs or after-tax brokerage accounts). Some significant tax and health insurance premium planning opportunities could exist. In many cases, it could be wise for them to spend less out of their pre-tax IRA or 401(k) accounts during this time and take more funds out of Roth IRAs or an after-tax brokerage account. By doing so, income hitting their tax return would likely be significantly less compared to drawing the majority of income from the IRA or 401(k). This, in turn, could qualify them for large health insurance premium subsidies that could save them tens of thousands in the years leading up to Medicare.

Conclusion

As with any retirement income planning strategy, multiple factors must be considered, and the above example is certainly not a one-size-fits-all approach. If you find yourself in this window, where you are on an individual plan before Medicare, I encourage you to discuss your retirement income plan with your adviser. Not doing so could end up costing you thousands in unnecessary tax and insurance premiums.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Bob Ingram, CFP® and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with the appropriate professional.

Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) I the U.S. which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.