Arden Dale for the Wall St Journal writes: Financial advisers see a golden opportunity for older clients to save taxes and build wealth by tapping their tax-deferred accounts instead of letting the money sit. They may have to sell the idea, however, because lots of people believe it's best to leave their IRAs or 401(k) accounts untouched until the government requires them to start making withdrawals at age 70½.
At 59½ years, account owners can start taking out money with no tax penalty. At 70½, they must withdraw a minimum amount each year. Between these milestones, many are in a low tax bracket that allows them to take money from a tax-deferred account relatively painlessly. The goal of creative planning is to keep the account from getting so big that it becomes a tax burden later on, and to build wealth outside of it.
"I call it the sweet spot for tax planning," says Ed Slott, an expert on IRAs and other retirement savings accounts. Tax-deferred accounts, he adds, are "infested with taxes," and long-term planning is a must to minimize them.
California adviser Stefan Prvanov says some of his retired clients come in feeling confident because they know they will be in a low tax bracket over the short term. They may be living off a taxable account and have a large 401(k) or IRA they don't plan to tap until 70½. A 62-year-old, for example, may know he will owe little or nothing in taxes at least until he's 65. That is not looking far enough ahead, the adviser cautions.
The Internal Revenue Service has loosened restrictions on moving money from a traditional tax-deferred account to a Roth account, a tactic that now is hugely popular with advisers as a tool to help clients in or near retirement. Mr. Prvanov says his firm averages between 30 and 40 Roth conversions a year. Roth owners pay the taxes upfront on money going into these accounts, which can grow tax-free and face no taxes on withdrawals later.
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