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You’ve said that in the future more people will be caught up in Is Roth key to avoiding the Torpedo?
the Tax Torpedo. Why is that? Yes. You’ll want to set up a Roth account. It doesn’t have
It’s happening now. About half of retirees have to pay taxes on to be super-large at the start. But during the early period,
their benefits. you’ll begin a strategy of aggressively converting to Roths.
The main reason is that while most of the tax code is infla- You can convert from a traditional IRA or with a 401(k)
tion-adjusted, the threshold for paying taxes on Social Security rollover. So during that early period, you’ll be drawing all
benefits hasn’t changed since about 1994. So every year, more your adjusted gross income out of the tax-deferred account
and more people will be facing Social Security taxes just due more aggressively at a higher tax bracket before you start
to inflation. Social Security.
After you start receiving benefits, you’ll try to keep
Can’t the government change the code to address that? your adjusted gross income lower, as from Roth distribu-
Yes. Most of the tax code is adjusted for inflation every year, tions; proceeds from a reverse mortgage, life insurance,
and tax brackets go up. They could easily decide to do that for or the principal from your brokerage account — taxable
the Social Security tax threshold as well. I don’t know why income sources.
they haven’t.
What’s a case that illustrates avoiding the Tax Torpedo?
Is the Social Security Tax Torpedo something that advisors If a [hypothetical] couple starts to claim Social Security and isn’t
should be informing their clients about? being very strategic about taxes, they would run out of money
Yes. And an advisor trained in retirement planning — who has at age 88. But by being more strategic around tax planning and
the RICP [Retirement Income Certified Professional] designa- avoiding the Tax Torpedo, they wouldn’t run out of money
tion — definitely learns about this. then — they’d get six more years of retirement spending.
It certainly requires advance planning. For instance, if
you’re in your 60s and retired but delay Social Security to Would buying a QLAC — qualified longevity annuity
age 70 and go on an aggressive Roth conversion strategy, you contract — help in staying relatively clear of the Torpedo?
might be able to get yourself set up so that once you start Social That certainly can be part of the planning. You’ll have this tax-
Security, even with $2 million dollars of assets, you can avoid a able income source later in life, when by that point, you may
big chunk of the Tax Torpedo. have less taxable income.

MARCH 2022 INVESTMENT ADVISOR 23