IRA Withdrawals during retirement and Social Security
Most financial advisors say that you should wait to take Social Security at your maximum required age (66-67). Since I have a child with disabilities I would like to leave the bulk of my IRA funds for his care when I pass. For that reason, I plan to take my SS at 62. Does anyone see a problem with that? I have over $1 million in my IRA.
Permalink Submitted by Alan - IRA critic on Fri, 2021-02-19 14:02
The age at which SS delayed retirement credits max out is 70, and your own RMDs start at 72. After you retire, the years between retirement and the start of SS and RMDs provide the best opportunity to convert some of your IRA to a Roth IRA, since you can do it at a lower rate. You should be able to pay the taxes on the conversions with other funds than from the conversion distribution. However, your entire financial and income situation needs to be assessed in order to determine whether you should convert a portion or not. You should also consider a special needs trust (SNT) for the child, which would be named as the beneficiary of your IRAs if you are single. What other assets might the child inherit?
As a disabled beneficiary of the SNT, the child would be treated as an EDB (eligible designated beneficiary) and RMDs paid to the SNT would be based on child’s single life expectancy upon your death. This avoids the 10 year rule. Child would also be able to continue other govt benefits, and upon the child’s death, any assets remaining in the SNT could be inherited by others instead of going to the govt to recover the costs of those govt benefits child would not receive with an inherited IRA of value.
Your own life expectancy should also be considered before starting benefits at 62, since that will result in roughly a 30% reduction in your SS benefit, and SS has a COLA which increases it’s value compared to a pension. So it is not possible to determine when you should start SS without a total analysis by a retirement professional.
Permalink Submitted by Humberto Guzman on Fri, 2021-02-19 14:39
Thank you, Alan. We do have a special needs trust. I didn’t include that I have a federal government pension. We can live comfortably with the pension and SS without withdrawing from our IRA. Sorry for not including that information.
Permalink Submitted by William Tuttle on Fri, 2021-02-19 14:33
In general, it does matter matter whether your child receives taxable funds from a special needs trust, tax-deferred money from a traditional IRA, tax-free money from a Roth IRA or ABLE account.
Age 66-67 is the Social Security (SS) full retirement age (FRA) when you receive 100% of your primary insurance amount (PIA). 70 is the age at which you receive the maximum SS benefit (132% of PIA).
The determination of your optimal SS benefit age should not really be any different than any other individual. You should use one of the many excellent SS benefit age calculators.
It would make sense to optimize the IRA beneficiaries to be an eligible designated beneficiarie (EDB).
The SECURE ACT limited lifetime retirment account distributions to only EDBs.
The owner’s surviving spouse
The owner’s child who is less than 18 years of age
A disabled individual
A chronically ill individual
Any other individual who is not more than 10 years younger than the deceased IRA owner.
It would make the most sense to:
If you haven’t already done so. Open an ABLE account for your disabled child. All contributions from all parties made to the ABLE account are limited to the Gift Tax annual exclusion. Care should be taken to not exceed a balance of $100,000, at which point it will interfer with government benefits.
Create a special needs trust
Name the trust as beneficiary of the IRA account (s). Make sure it has IRS required language for an Inherited retirement account pass-thru.
Gift to the trust whatever Gift Tax annual exclusion you and a possible spouse have remaining after any ABLE contributions.
Make whatever contemporaneously necessary gifts to the trust in excess of the annual exclusion which will apply against the lifetime Gift/Estate lifetime exclusion.
Name the trust in your will to receive any other assets you want the disabled child to have.
Maybe Bruce Steiner, a well known knowledgeable and competent trusts and states attorney will see this post and add to or modify my response. This is really something that should be put together by a trust and estates attorney. It will be money well spent.
Permalink Submitted by Humberto Guzman on Fri, 2021-02-19 14:44
Thank you, Spiritrider. I did add additional information to my original question for Alan. We do have a special needs trust, and I receive a federal government pension. We can live comfortably with my pension and SS without withdrawing from my IRA on a regular basis.
Permalink Submitted by William Tuttle on Fri, 2021-02-19 19:44
If you have not already opened a 529 ABLE account and the disabled child is eligible. You should strongly consider opening one.
Earnings in an ABLE account are tax free when used for qualified disabily expenses. There are several classes of expenses that are not allowed with an SNT, that are allowed with an ABLE account.
There is nothing in this fact pattern that would necessarily suggest that age 62 SS benefits are a good idea. It is more likely that having the spouse with the smaller earnings record claim at FRA and the spouse with the higher earnings claim at age 70.
This would allow the period until those milestones to be used for tax efficient Roth conversions. It would be useful for the disabled child to have a mix of taxable, tax-deferred and tax-free source in the SNT. Of course this requires a trustee with sound tax knowledge or professionals to rely on.
Permalink Submitted by Bruce Steiner on Sat, 2021-02-20 16:17
Spiritrider: thanks for the kind words. Your points are good. However, if the original poster worked for the government and is considering taking either IRA distributions or Social Security sooner than required, he/she probably doesn’t expect to have a taxable estate.
Assuming your pension and your investment income isn’t sufficient, and you don’t have high basis assets to use, there are advantages and disadvantages to each choice. You may want to create a spreadsheet, making some reasonable assumptions as to investment returns, tax rates, and how long you and your spouse will live. You should run it through the year your child’s trust will have to take its last annual required distribution.
There’s usually a Social Security benefit to having the spouse with the larger earnings to defer Social Security until 70. The monthly Social Security benefits will be much larger, they’re indexed for inflation, and if that spouse dies first, the other spouse’s Social Security benefits will increase to the level of the deceased spouse’s Social Security benefits. However, you’ll incur capital gains taxes if you have to sell appreciated assets for living expeses, or you’ll give up some of the benefits of income tax deferral if you have to tap your IRA sooner than required. The amount by which benefits increase if you defer is based on old life expectancy tables, and on the general population which includes people in poor health.
If you sell appreciated assets to cover your cash shortfall in order to defer Social Security, you’ll pay capital gains tax that you would avoid by holding the appreciated assets until death.
While you would be taking on some investment risk, you could borrow against your taxable account. A bank would probably give you a line of credit against your taxable account at the prime rate or slightly above the prime rate. If your securities are diversified, your cash shortfall isn’t very much (which is probably the case if you can make it up by taking Social Security before 70), you’re not that far away from 72, and your Social Security at 70 and your required distributions at 72 will be sufficient (after your cash needs) to repay it over a reasonable period of time, that could be a possibility.
There’s an income tax benefit to deferring IRA distributions as long as possible. To the extent you take IRA distributions before they’re required, you give up some of this benefit. Due to the SECURE Act, for most people this benefit is less than it used to be. However, if you have a child who qualifies as disabled for this purpose, you can still take advantage of the stretch.
I’m not sure what you mean by having a trust for the child. Unless you expect to have a taxable estate, you would probably create this in your Will rather than during lifetime, to get the basis step-up at death.
There are some tricky issues in the drafting, which are beyond the scope of this forum.
Bruce Steiner