Retirement Tax Planning — Preparing for the Future

by Jennifer Smith, CPA, JD, CDEI | Apr 29, 2021

When it comes to retirement tax planning, there can be a few unexpected curves along the way. Luckily, your clients have access to a tax professional like you who can answer any retirement tax planning questions and guide them through the process.

In this article and accompanying video, we’re going to look at four simple topics you can discuss with your clients to put their minds at ease and give them confidence heading into the next chapter of their lives.

Early 401(k) Withdrawal

Let’s say you have a client who isn’t quite retirement age but who has hit a bumpy road in their life. They come to you and ask you questions about an early 401(k) withdrawal. It’ll be your responsibility to ensure your clients understand they should only make early 401(k) withdrawals as a last resort. Discuss with your client the setbacks that come with early 401(k) withdrawals, such as an early withdrawal penalty on top of the due income tax.

Suppose your client is still interested in early 401(k) withdrawal after understanding the drawbacks. You can ask them questions about their goals and needs to see if you can find an alternative option, or you can see if they qualify for a minimization of the early withdrawal fees and penalties for reasons like age, job status, or financial hardship.

Unless your client qualifies for another exception, IRA withdrawals are considered early until they reach age 59½.

Roth IRA Conversion

If your client anticipates they will be in a higher tax bracket upon retirement, they may be interested in a Roth IRA conversion.

What is a Roth IRA conversion? A Roth IRS conversion involves moving money from a traditional IRA or 401(k) retirement account into a Roth IRA. Contributions into a traditional 401(k) or IRA are tax-deductible with income tax paid upon withdrawal. On the other hand, Roth IRAs do not offer a tax break at the time of contribution, but withdrawals from Roth IRAs are tax-free upon retirement.

Excess Roth IRA Contributions

If your client took their eyes off the road and contributed more to their Roth IRA than they qualify for, they may come to you for help. The IRS sets limits on how much can be contributed to a Roth IRA each year based on age and adjusted gross income. Due to your client’s excess contribution above that limit, your client is now subject to a tax penalty.

There are several ways you can help your client fix a problem like this and save them money on penalties. To learn more, WebCE offers the online course Tax Treatment of Individual Retirement Arrangements. For only $14.95, this course provides an overview of both traditional IRAs and Roth IRAs, including topics like eligibility rules, limits on contributions, and tax considerations for both traditional IRAs and Roth IRAs, as well as Roth IRA conversions and transfers and Roth IRA death benefit distributions.

Pension Withdrawals

Suppose you have a client who is at a fortunate spot in their life and can begin withdrawing from their pension. Most pension withdrawals are taxable because contributions are made pre-tax. Make sure to confirm the date of birth on their driver’s license — pensions, like 401(k) plans, have early withdrawal tax penalties.

You may see if your client is interested in retiring in one of the fourteen states that don’t tax pensions or 401(k) plans. Nine of these states have no state income taxes at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. The remaining three — Illinois, Mississippi, and Pennsylvania — don’t tax distributions from 401(k) plans, IRAs, or pensions. Alabama and Hawaii don't tax pensions, but these states do tax distributions from 401(k) plans and IRAs.

Retirement Planning Online Tax Courses

With your help, your retirement age clients can set their minds at ease. Become the retirement tax expert older Americans can trust while they navigate the road to retirement. With retirement tax courses from WebCE, you’ll quickly become the trusted source for retirement tax planning in your area. WebCE has tax courses covering many retirement planning and other tax topics to provide you with the most up-to-date information and training.

To view our retirement planning tax courses or to place an order, click the course catalog button below. You can also call our world-class customer service team at 877-488-9308 to place an order, ask about CE requirements, or get help with anything else you might need.

Tax CE Course Catalog