Page 36 - Investment Advisor January/February 2022

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Money converted to a Roth IRA, along with future earnings Qualified Longevity Annuity Contracts
on that money, is removed from the pool of funds that are sub- QLACs are annuities that can be purchased only with assets
ject to RMDs in future years. If a client already is taking their from a retirement plan such as a traditional IRA, 401(k)
RMDs, all RMDs must still be taken in the current year; doing a 403(b), 457(b) or similar retirement plan. The maximum
Roth conversion does not reduce any part of their RMD obliga- that can be contributed to a QLAC from all accounts is
tion in the year of the conversion. $135,000. Income from a QLAC can be deferred to age 85.
The decision as to whether or not a Roth conversion is right This also serves to defer — but not eliminate — the RMDs
for your client should be done in the context of their overall on this money until your client begins taking distributions
financial planning objectives. Considerations include: from the QLAC.
• Current-year income and taxes. Years in which your cli- The main benefit of a QLAC is that it allows your cli-
ent’s income is lower than normal can be good years to con- ent to defer some of their retirement account balance into
sider a Roth conversion. This might include the period after the future before taking the annuity payments. This can
the client has retired but has not yet commenced taking Social help clients preserve this money for the latter part of their
Security benefits. Clients in this “gap” period often find them- retirement. Deferring RMDs is a side benefit here. The key
selves in a lower tax bracket than in other years. decision is whether a QLAC is right for them and, if so, select-
• Are there potential ing the best QLAC annuity
non-spousal heirs to their Contributing to a Roth IRA provider for them.
IRA? If so, a Roth conver-
sion can save these heirs or Roth 401(k) can be a Working at Age 72
on potential taxes after way to limit future RMDs. and Beyond
inheriting the IRA. The Clients who are working at
analysis should look at the Contributions to a Roth 401(k) age 72 or beyond can defer
overall family tax situation their RMDs associated with
to see if it makes sense for can be especially useful, as there the 401(k) or other employ-
your client to essentially er-sponsored retirement
prepay taxes for the next are no income limitations on a plan under the “still work-
generation. ing” exception. As long as
• Does your client need client’s ability to contribute. they do not own 5% or more
the money from the RMDs of the company, and if the
on the traditional IRA? If not, then paying the taxes now in company has incorporated this option into their plan docu-
exchange for the ability to allow the converted Roth funds to ments, then employees can defer RMDs on money held inside
continue to grow tax-free could be a good trade-off. the plan as long as they are employed by the company.
This RMD exception does not apply to money in an
Roth Contributions IRA or any other retirement plan outside their current
Contributing to a Roth IRA or Roth 401(k) can be a means for employer’s plan.
clients to limit future RMDs. Contributions to a Roth 401(k) In some cases, it might make sense to move money from a
can be especially useful here, as there are no income limita- client’s IRA or an old 401(k) plan into the current employer’s
tions on their ability to contribute and the contribution limits plan in a reverse rollover, if the plan allows this, to take
are higher than for a Roth IRA. advantage of the RMD deferral on these funds. The reverse
Money held in a Roth IRA is not subject to RMDs. However, rollover should be done only if the current plan’s investment
money in a Roth 401(k) is subject to RMDs, though they are not options are solid and low-cost. The benefits of deferring
taxed. This can be avoided by rolling the Roth 401(k) account RMDs quickly can be negated if the current employer’s plan is
balance over to a Roth IRA when leaving that employer. a poor one. The source of the money rolled into the plan must
Note that money in a Roth IRA is not only exempt from be the same as the money in the current plan — for example,
RMDs for the account holder, but also for their spouse if they pretax contributions.
inherit the Roth IRA. Additionally, Roth IRA money inherited Overall, deferring or reducing your client’s RMDs can be a
by non-spousal beneficiaries will not be taxed if certain condi- positive strategy for them. But the decision as to whether to
tions are met. undertake any or all of the strategies that can accomplish this
The trade-off for your client is between the tax benefits of should be looked at in the context of your client’s overall tax
making pretax contributions into a 401(k) or traditional IRA and financial planning situation.
now versus making after-tax contributions and being able to
withdraw funds tax-free in retirement; and having the option Roger Wohlner is a financial writer with over 20 years of industry
to simply let this money grow tax-free in the Roth IRA. experience as a financial advisor.

34 INVESTMENT ADVISOR JANUARY/FEBRUARY 2022 | ThinkAdvisor.com