For some clients, taking distributions from their traditional individual retirement accounts before retirement may be a bridge too far. For others, the strategy could lead them from pre-retirement jitters to higher Social Security benefits and lower taxes a decade or more down the road.
That's because the array of rules and figures outlined in the slideshow below add up to complex calculations that vary greatly among clients whose financial advisors and tax professionals may want
The thicket of financial calculations, IRS guidelines, Medicare rules and long-term planning involved with deciding when to begin withdrawals and Social Security benefits shows the need for careful, individualized advice, according to four experts who spoke with Financial Planning.
The last two months of a year mark an especially good time to discuss the possibilities of the bridge with clients. Prior to New Year's Day, factors such as the level of capital gains, investment dividends, business-related transactions or job situations are coming into focus, said Valerie Escobar, a senior wealth advisor with Kansas City, Missouri-based advisory practice
"As we're approaching the end of the year, you have a better sense of what your income picture is going to look like," Escobar said. "Having that clarity of the picture makes the year-end the best time to be looking at that."
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"Those are a great example of something that you really only get one chance to make the right decision," Wood said. "Once you make your decision, you are very much going to be stuck with that decision."
In addition, those considerations often determine whether clients get stuck with "stealth taxes" on their benefits and whether they have to pay an income-related monthly adjustment amount on their Medicare premiums according to Sarah Brenner, the director of retirement education with retirement consulting firm
Once traditional IRA owners reach 59½ years old — or the age they must be to avoid getting "whacked with a 10% penalty" for a withdrawal, unless they're for certain exceptions — they're going to be thinking through how the distribution affects their income.
"It bumps up what you're going to pay for Medicare," Brenner said. "One thing they hate is IRMAA charges."
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Other than a general rule that claiming Social Security benefits while still employed is not usually a good idea, Heather Schreiber, the founder of advanced planning consulting firm
"First of all, I'd say, 'Don't listen to your neighbor,'" Shreiber said. "Everyone's decision is very unique to them. I really don't have an, 'Everyone should file at X date.'"
For a rundown of the key numbers involved with the IRA "bridge" strategy to claiming bigger Social Security benefits later, scroll down the cardshow. To read FP's year-end tax planning feature, "A primer on the IRA 'bridge' to bigger Social Security benefits,"
