Retirement Planning Recommendations
Retirement planning is a major focus of Series 6 products. Understanding when to recommend different retirement vehicles and strategies is essential for making suitable recommendations.
Traditional vs. Roth IRA Selection
When Traditional IRA is Better
| Situation | Why Traditional |
|---|---|
| Higher tax bracket now | Get deduction when taxes are highest |
| Expect lower bracket in retirement | Pay taxes when rates are lower |
| Need current-year tax reduction | Deductible contributions reduce AGI |
| Near retirement | Less time to benefit from tax-free Roth growth |
When Roth IRA is Better
| Situation | Why Roth |
|---|---|
| Lower tax bracket now | Pay taxes at lower rate |
| Expect higher bracket in retirement | Withdraw tax-free when rates are higher |
| Young investor | Decades of tax-free growth |
| Want no RMDs | Roth has no lifetime RMDs |
| Estate planning | Pass tax-free income to heirs |
Key Comparison
| Factor | Traditional IRA | Roth IRA |
|---|---|---|
| Contribution | May be deductible | Never deductible |
| Growth | Tax-deferred | Tax-free |
| Withdrawals | Taxable | Tax-free (if qualified) |
| RMDs | Required at 73 | None during owner's lifetime |
| Income limits | None for contribution | Yes for contribution |
Key Point: If unsure whether tax rates will be higher or lower, consider splitting contributions between both account types.
401(k) Rollover Considerations
When a customer leaves an employer, they have several options for their 401(k):
Rollover Options
| Option | Pros | Cons |
|---|---|---|
| Roll to IRA | More investment choices, consolidated accounts | May lose creditor protection |
| Roll to new 401(k) | Keeps creditor protection, may have loan option | Limited to new plan's options |
| Leave in old plan | No action required | Multiple accounts to track |
| Cash out | Immediate access | Taxes + 10% penalty if under 59½ |
Direct vs. Indirect Rollover
| Type | Process | Tax Impact |
|---|---|---|
| Direct (trustee-to-trustee) | Funds move directly | No withholding, no time limit |
| Indirect (60-day) | You receive funds | 20% withholding, must redeposit in 60 days |
Best Practice: Always recommend direct rollover to avoid 20% withholding and 60-day deadline risks.
Variable Annuities for Retirement
When Suitable for Retirement Planning
| Situation | Why Consider VA |
|---|---|
| Maxed out 401(k) and IRA | Additional tax-deferred savings |
| Long time horizon (10+ years) | Time to overcome fees and surrender period |
| Want guaranteed income | Lifetime income options available |
| Death benefit important | Protects beneficiaries |
When NOT Suitable
| Situation | Why Not |
|---|---|
| Inside IRA/401(k) | Redundant tax deferral, extra fees |
| Short time horizon | Surrender charges |
| Need liquidity | Early withdrawal penalties |
| Cost-conscious | Higher fees than mutual funds |
Systematic Withdrawal Strategies
Types of Systematic Withdrawals
| Strategy | Description | Best For |
|---|---|---|
| Fixed Dollar | Same dollar amount each period | Predictable budget needs |
| Fixed Percentage | Same % of account value | Adjusts with market |
| Fixed Shares | Same number of shares sold | Allows natural fluctuation |
| Fixed Time | Depletes account over set period | Known time horizon |
The 4% Rule (General Guideline)
Traditional rule of thumb: Withdraw 4% of initial retirement portfolio annually, adjusted for inflation.
- Designed for 30-year retirement
- Assumes diversified portfolio
- Not guaranteed, just a guideline
- May need adjustment based on market conditions
Sequence of Returns Risk
Definition: The risk that poor returns early in retirement disproportionately harm the portfolio.
Why It Matters
| Scenario | Impact |
|---|---|
| Bad returns early | Withdrawals deplete portfolio faster, less time to recover |
| Bad returns later | Larger portfolio can better absorb losses |
Mitigation Strategies
- Maintain some conservative holdings (bonds, cash)
- Be flexible with withdrawal amounts
- Have emergency fund separate from investment portfolio
- Consider guaranteed income sources (annuities, Social Security)
Social Security Considerations
Timing Factors
| Age | Benefit Impact |
|---|---|
| 62 (earliest) | Reduced benefit (~30% less) |
| Full retirement age | Full benefit |
| 70 (latest) | Enhanced benefit (~8%/year increase) |
Factors to Consider
- Life expectancy
- Other income sources
- Need for current income
- Spousal benefits
- Tax implications
RMD Planning
Key RMD Rules
- Required beginning at age 73 (75 starting 2033)
- Applies to Traditional IRAs, 401(k)s, SEPs, SIMPLEs
- Does NOT apply to Roth IRAs
- Penalty for missing: 25% (reduced to 10% if corrected)
RMD Strategies
| Strategy | Description |
|---|---|
| QCD (Qualified Charitable Distribution) | Donate RMD directly to charity, excludes from income |
| Roth Conversion | Convert Traditional to Roth before RMDs start |
| Strategic Timing | Take first RMD in year you turn 73 vs. delaying to April 1 |
Key Exam Points
- Roth vs. Traditional - Lower bracket now = Roth; higher bracket now = Traditional
- Direct rollover - Always preferred to avoid 20% withholding
- VA in IRA - Generally unsuitable (redundant tax deferral)
- Sequence of returns - Bad early returns hurt more in retirement
- Social Security - Delay increases benefit ~8% per year
- RMDs - Start at 73, don't apply to Roth IRAs
- 4% rule - General guideline for sustainable withdrawals
A 28-year-old in a 22% tax bracket expects to be in a higher bracket when they retire. Which retirement account recommendation is MOST suitable?
A customer is rolling over their 401(k) to an IRA. Which rollover method should be recommended to avoid mandatory withholding?
Which risk specifically describes the danger of poor investment returns early in retirement depleting the portfolio faster?
5.6 Education Planning Recommendations
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