“Goodbye tension, hello pension.” This well-known retirement quip speaks to the financial security we hope to achieve when work becomes optional. With the demise of employer-sponsored pension plans, however, creating a sustainable lifetime income stream can seem more challenging than ever.

Effective tax planning can do much to extend clients’ retirement assets and make running out of money less likely. Here are top strategies that many have found helpful.

  1. Rollover Your 401(k)*

For most clients, their employer retirement plan (401(k), profit sharing, etc.) represents a significant portion of their nest egg, so making the right decisions is imperative. Upon leaving your employment, a distribution decision may be needed. Key considerations include:

  • Age: If under 59 ½ and planning to take withdrawals, we can avoid the 10 percent premature withdrawal penalty (see below) by leaving funds with your employer (if allowed to do so).
  • Advantages that prompt many clients to rollover their retirement plan to their own IRA include:
    • Tax-Free Transfer: Funds transferred directly to your IRA custodian can postpone taxes.
    • Investment Flexibility: Self-directed IRAs offer a wide range of programs as opposed to the often restrictive employer approved funds in 401(k)s.
    • Administrative Convenience: Withdrawals and investment changes can be done directly without working through an HR department plan administrator or plan custodian.
  • Costs: Employer plans often receive fee discounts, so be sure to weigh any cost increases against benefits before making a decision.

2.  IRA

When contemplating IRA withdrawals, keep these in mind:

  • Those under age 59 ½ could face a 10 percent tax penalty in addition to having all withdrawals recognized as ordinary income. Consider:
    • Substantially Equal Payments: For those who can take early up to age 59 ½, IRC Sec 72t offers an exception to the 10 percent penalty for withdrawals taken in substantially equal payments until age 59 ½.
    • Net Unrealized Appreciation (NUA): For those with employer stock in their 401(k), the special NUA rule allows for ordinary income tax on the cost basis upon withdrawal.
  •  Gains receive long-term capital gains when subsequently sold.
  • Employer stock can be rolled over to your IRA while preserving the NUA tax advantage so long as the transfer is done “in-kind.”

3.  Required Minimum Distributions

Generally all retirement plans must start distributions by April 1st of the year following the one in which the owner reaches age 70 ½.

  • Amount is based on the prior year end plan balance and owner’s life expectancy.

4.  Roth Conversion

Because Roth IRAs allow tax-free qualified withdrawals, clients may consider converting all or a portion of their traditional IRAs. Key factors:

    • Pre-tax portion of IRA (that which has not yet been taxed) is taxed at time of conversion.
      • That tax is an upfront cost that takes several years to “make up” before the account is even which makes it important to weigh that cost against potential Roth benefits.
    • Premature 10 percent penalty does not apply even if under 59 ½.
      • As long as no subsequent withdrawals are made until after 59 ½.
    • Withdrawals qualify as tax-free if done after age 59 ½ and five years after the first Roth was established, as well as for death, disability and for first time home buyers.

5.  Social Security Retirement Benefits

Can be tax-free or partially tax free depending on total income. Being aware of the rules can help:

  • Gross Income (P-AGI).
    • Preliminary Adjusted Gross Income includes earnings, pensions, interest, dividends, municipal bond interest, and 50 percent of social security benefits.
    • For P-AGI over $25,000 ($32,000 for married) 50 percent of benefits become taxable.
  • There is no age forgiveness. So, for clients whose income may be near these thresholds, it is important to coordinate discretionary income such as IRA withdrawals.

Distributions earned from investments not held in retirement plans or IRAs are taxable when paid even if reinvested. Strategies to consider:

  • Mutual funds typically pay out capital gains near year end regardless of the time shares have been held. Therefore, we advise clients to consider postponing fund purchases until after the fund’s “record date.” A record date is the date established by a mutual fund issuer for determining the holders who are entitled to receive a distribution or dividend.
  •  Municipal bond interest can be double tax-free for those in your state of residence.
    • Recall interest is added to your P-AGI calculation when figuring social security taxation.

Annuity income may be fully or partially taxable. Key factors include:

  • Contributions that used after-tax dollars are not taxable when distributed.
  • Annuity withdrawals must be taxed as earnings first, before tax-free principal can be accessed.
  •  Annuitization payments are proportionally taxed based on an “exclusion ratio” until all principal has been distributed. Afterwards 100 percent of payments may be fully taxable.

6.  “Bunching” Income and Deductions

To help reduce taxes in alternate years, consider accelerating income when there are excess deductions.

  • Similarly, accelerating your itemized deductions (medical expenses, state and local income and sales taxes, mortgage deduction, charitable contributions) when the discretion exists to do so, can help offset higher income years and protect against deduction “phase outs.”

7.  Spend Principal to Delay Taxable Distributions

In theory we are taught it is taboo to spend principal. In practice, that spent principal could be replaced with earnings from other accounts that are not tapped. The goal is to enhance our tax control without sacrificing future cash flow. This can be done with careful planning to help preserve long-term cash flow potential.

  • Spending long-term capital gains can give us tax advantages and similarly allow the untapped account to potentially continue growing uninterrupted.
  •  Generate qualified dividend income which receives tax-favored treatment.

8.  Gift Appreciated Assets

Many of us are gratified by making charitable contributions. Doing so using appreciated assets can give the same gratification with greater tax benefit. That’s because the donor receives a charitable deduction for the asset’s current market value without having to recognize the taxable gain.


Those proud of paying taxes in the lowest bracket may be missing an opportunity to enhance cash flow. In many situations there may be more advantage to taking additional income so to “fill up that low tax bracket cup” and build a cushion for future years.

With so many moving parts it is important to reassess annually with both your CPA and your financial planner so they can help coordinate your retirement income and help you achieve a “Life Well Lived”.

*Please keep in mind that rolling over assets to an IRA is just one of multiple options for your retirement plan. Each of the following options are different and may have distinct advantages and disadvantages.

  • Roll assets into an IRA
  • Leave assets in your former employer’s plan, if plan allows
  • Move assets into a new employer’s plan, if plan allows
  • Cash-out or take a lump-sum distribution


Each of these options has advantages and disadvantages and the one that is best depends on your individual circumstances. You should consider features such as investment options, fees and expenses, and services offered. Your Financial Advisor can help educate you regarding your options so you can decide which one makes the most sense for your specific situation. Before you make a decision, read the information provided in this piece to become more informed and speak with your current IRA trustee/custodian and tax professional before taking any action.

When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared between the employer plan and the IRA include fees & expenses, services offered, investment options, when penalty free withdrawals are available, treatment of employer stock, when required minimum distribution begin and protection of assets from creditors & bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets. 

Investors should consider the investment objectives, risks, charges, and expenses of an investment company carefully before investing. The prospectus contains this and other information and should be read carefully before investing. The prospectus is available from your investment professional.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of WFAFN, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. 

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Wells Fargo Financial Network LLC (WFAFN) does not provide tax or legal advice. We strongly recommend an advanced tax and estate planning expert be contacted for further information. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation. 

Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara and Santa Barbara City College.

For more information, visit www.KauffmanWM.com or call (866) 467-8981. Kauffman Wealth Management and serves clients from two office locations: 140 South Lake Avenue, Suite 307, Pasadena, CA 91101 and 550 Periwinkle Lane, Santa Barbara, CA 93108 (by appointment only).   Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC.  Kauffman Wealth Management is a separate entity from WFAFN.

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