How to Manage Retirement Account Withdrawals in Wealth Planning

By Alan Jahde, JD, LLM (taxation)

Investors are often programmed to think it’s almost never a good idea to take early withdrawals from a retirement account. It’s the role of advisors to help them understand when it might actually make sense to take the funds and accept the tax liability.

In these scenarios, advisors often recommend that their client move to a Roth IRA and pay the tax upfront on conversion.

But awareness is growing about an alternative solution: a “stretch annuity.” This is an expanded use of a private placement variable annuity (PPVA), and it may allow ultra-high-net-worth (UHNW) families with significant retirement accounts to defer and stretch the tax bill over multiple generations.

Early Withdrawal Scenarios for UHNW Families

Early withdrawals from retirement accounts may make sense for clients experiencing scenarios such as:

• Losses from other assets that could reduce the liability of the retirement plan withdrawal
• Desire to do estate planning/wealth transfer planning to transfer/gif retirement account assets to successive generations
• Planning to retire to or moving to a state of residence that has a higher state income tax rate than present state of residence
• Currently in a low-income tax year and correspondingly in a low tax bracket
• Retirement account values reduced because of the 2022 stock market decline, resulting in less income tax on the account value
• Not needing nor particularly wanting required minimum distributions (RMD) withdrawals of retirement accounts mandated at age 72

Limitations to Roth IRAs

While Roth IRAs are commonly recommended by advisors for clients experiencing one of the above reasons for taking early withdrawals from retirement accounts, Roth IRAs have limitations that can be particularly troublesome for UHNW planning:

• No estate planning/wealth transfer/gifting opportunities to successive generations
• Retirement accounts remaining at death are automatically included in your client’s estate
• Five‑year hold period for withdrawals from Roth IRA conversion amounts
• Mandatory withdrawals by heirs

Stretch Annuity Benefits

On the other hand, a stretch annuity solution can:

• Be low-cost and institutionally priced
• Offer no surrender fees
• Defer and stretch the tax bill over multiple generations
• Provide flexible investment choices
• Create multi-generational wealth planning opportunities

We detailed how a stretch annuity can be used for multi-generational wealth planning in our last blog.

We’re also available to talk with advisors about this innovative use of PPVA.

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Please reach out anytime.