Page 34 - Investment Advisor - October 2021

COVER STORY

hybrid-type product, which is either life insurance with a situation to consider for a conversion when their tax bracket
long-term care rider or an annuity product with a long-term is relatively low.
care rider. Another idea for retirees is a qualified charitable distribu-
The hybrids have become a lot more popular over the past tion [QCD], where you’re taking a withdrawal from your IRA
decade, especially because premiums on pure long-term care and sending it directly to a charity so that it never touches
policies have increased substantially. your adjusted gross income. You’re able to get a tax break
on the charitable contribution, which many people aren’t
In general, do annuities have a place in a retirement eligible for because they’re claiming the standard deductions
portfolio nowadays? versus itemizing.
When you look at all the academic research, there’s a compel-
ling case for holding an annuity as part of a retirement plan as What’s one critical concern for retirees to keep in mind
a means of enlarging your lifetime income stream. A very basic nowadays?
low-cost annuity can be a good fit for some investors. The face of retirement has changed pretty drastically over the
past couple of decades. As recently as the 1990s, it was tenable
Any tips about 2021 tax planning for retirees and pre-retirees? for retirees even without a lot of wealth to subsist on with-
I like the idea of doing a little preemptive tax planning, like drawals from their portfolios.
considering whether a conversion of a traditional IRA asset Today, that’s not a reasonable way to go about retirement
to a Roth IRA might be appropriate. For example, if one decumulation. If you have a portfolio with a 3% or 4% yield,
spouse has retired and the other hasn’t, that can be a good you’ve got a very risky-looking portfolio.

Beware the Social Security Tax Torpedo

atch out for the Social Security Tax Social
WTax Torpedo. It’s a hugely Planning Security
Portfolio
unwelcome part of 1983 tax reform, Financial Construction Retirement Trusts & Estates
Planning
Planning
which arrived when the Social Security
Administration trust fund was running
out of money. (Sound familiar?) But
there’s an effective tax-planning strategy
to steer clients out of the Torpedo’s path.
Wade Pfau, professor of retirement
income and director of the Retirement
Income Certified Professional program
at The American College of Financial
Services, says that since the threshold
for paying taxes on Social Security ben-
efits hasn’t been adjusted for inflation
since about 1994, more and more tax-
payers are — and will be — hit by the
Tax Torpedo.
However, with an “aggressive” Roth IRA avoiding the Tax Torpedo impossible,” he writes
strategy, even folks with “a couple of mil- on his popular blog, Retirement Researcher.
lion dollars in assets can avoid a big chunk of Wade Pfau In the interview, Pfau recommends that finan-
the Torpedo,” he argues. The goal is to have less cial advisors start talking about the Tax Torpedo
taxable income later in life when receiving Social early in clients’ retirement planning process. Upfront
Security since once a worker begins collecting and their tax- planning is essential to employ his strategy, which needs to begin
able income — from all sources — is above approximately before the start of Social Security. That time frame will be used
$70,000, they must pay taxes on 85% of their benefits. to draw income from Roth accounts at a higher tax rate.
The Torpedo is “super-complicated,” Pfau remarks. People “Subsequent Roth distributions do not count when deter-
that have “relatively modest resources” should use the Roth mining how much of Social Security is taxable,” writes Pfau,
conversation strategy, but “wealthier individuals may find that who is co-editor of the Journal of Personal Finance. He spoke

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