Case Study

• Entering retirement 
• Roth conversions
• RMD
• QCDs

Dave retired in 2017 when he was 64. His 401(k) retirement plan at that time was worth about $800,000, which he rolled into an IRA we began managing. Plus, he had a non-retirement account, owned jointly by him and his wife, worth about $500,000, which we also managed. Dave and Kathy gave to the church they attended and UGM (a nonprofit here in Spokane that helps the homeless). One thing they valued was not avoiding paying "Uncle Sam" more than they needed when distributing their accounts. Another goal was when Dave and Kathy passed away; they didn't want to leave their three adult children with a huge tax burden.

1. IRA Tax Bill: We sat down with Dave and his Kathy and discussed how inefficient a 401(k) or an IRA can be from a tax perspective. Even though it looked like he had an $800,000 account on paper, part of that money belonged to "Uncle Sam" because they would owe income tax on what would be withdrawn from the account. If our tax rates changed, he would lose even more of his nest egg. 
2. RMD Issue: When running our retirement projections, another opportunity we identified is the size of his IRA account. When Dave is forced to start taking RMDs (required minimum distributions) from his IRA at age 73, he will have a tax bill. The larger Dave's IRA, the more they will be forced to take out and count as income, pushing their income into the higher 22% tax bracket. 
3. IRA Inheritance Consequences: The final opportunity with their current plan is when Dave and Kathy both pass away. Their three children will inherit Dave's IRA, and the children will have only ten years to distribute the entire amount. Everything distributed by their children will be considered taxable income. The major problem is that at that time, their children will be in their prime earning years and be paying the tax at some of the highest tax rates. 

1. Roth Conversions: We presented the solution of systematically converting his IRA into a Roth IRA by which they can essentially prepay the taxes on his money so that the account can grow tax-free. We explained how there's a golden opportunity between retirement and when these other income sources start, like social security and RMDs, to prepay some tax while in a low tax bracket. We worked as a team with their accountant so that we would convert just enough still to keep them in the 12% tax bracket each year to lower the amount in his IRA and move it into the tax-free Roth IRA. Not only does that strategy allow the accounts to pass tax-free to their children, which is one of their goals, but Roth IRAs aren't required to do an RMD, which will save them from being forced into the 22% tax bracket. 
2. Utilize QCDs: Another recommendation we gave was to start giving to their church and UGM directly from their IRA instead of their savings account at age 70.5. The amount won't be taxable if they give directly from their IRA. This satisfies Dave's RMD obligation at age 73, lowering their tax liability. They used to give $12,000 a year to their church and UGM, and they were in the 12% tax bracket. Giving out their IRA will save Dave and Kathy $1,440 each year. 
3. Stress-Tested Financial Plan: We entered their budget and assets into our financial planning software to analyze whether their investments would last through retirement. They would. We also looked at worst-case scenarios like high inflation, bear markets or a long-term healthcare event to see how their plan worked. Even with those events, their financial plan performed great, which gave Dave and Kathy a lot of confidence. Kathy now didn't have to feel guilty about spending money from their retirement account. 
4. Optimized Investments: Their investment portfolio was optimized to fit their age and goals, so they weren't taking too much risk as they entered retirement. 
5. Recommended professionals: We gave the contact information of a few trusted estate planning attorneys and accountants because they were looking for a recommendations

1. Roth Conversions: Since we started working with Dave and Kathy seven years ago, we've converted, on average $27,000 from their IRA into a Roth each year, keeping them in the 12% tax bracket. Their IRA is over $1.1M, and their Roth IRA is over $260k. Since Dave just turned 70.5 this past year, we've set them up with a checkbook, and they are writing checks to their church and UGM directly from their IRA tax-free, saving them over $2,000 each year.
2. Estate Planning: Since working together, we've done estate planning with a local attorney we like. We've prepared Dave and Kathy's accounts, estate, and investments for unforeseen life events. They are enjoying retirement, using their RV to visit all the US national parks and spending time with their children and grandchildren.