Many successful law firm owners I know pride themselves on making strategically sound decisions. Yet when it comes to retirement distributions, I often see a concerning trend: the "keep-it-simple" approach of withdrawing proportionally from all accounts.
This approach might seem logical at first glance – after all, diversifying withdrawals feels like a natural extension of diversifying investments.
However, this approach could be costing you thousands in unnecessary taxes and missed opportunities.
The complexity of today's tax code, combined with the interplay between retirement income and various benefits, means that oversimplified distribution strategies often leave money on the table.
Let me share a recent story that illustrates this point perfectly. Last month, I met with a 62-year client who was working with a health insurance expert to explore premium subsidy options. For reference, this client was not a law firm owner, but the principal still applies.
The initial outlook wasn't promising – her modest IRA meant regular taxable distributions that would push her above the subsidy threshold. The situation initially seemed like a classic case of having too many assets to qualify for assistance, but not enough to be indifferent to the benefits.
But there was more to the story.
This client also had a sizable taxable brokerage account with a high cost basis, meaning minimal tax implications on withdrawals. The conventional wisdom would have suggested taking proportional withdrawals from both accounts. Instead, we saw an opportunity for something more strategic.
By emphasizing withdrawals from her taxable account, we completely transformed her situation. Each dollar we shifted from IRA distributions to taxable account withdrawals lowered her taxable income and moved us closer to our goal.
The results? Not only did she secure the income she needed with minimal tax impact, but she also qualified for those valuable premium subsidies.
This strategy created a three-year bridge until Medicare eligibility – a solution that wouldn't have been possible with a one-size-fits-all distribution approach. The savings from the premium subsidies alone added up to tens of thousands of dollars over this period.
Think about that for a moment. The right withdrawal strategy didn't just save on taxes – it made healthcare more affordable during a critical pre-Medicare window.
This is the kind of value that never shows up on an investment return statement. While many advisors focus solely on investment performance, the real opportunities often lie in these strategic planning decisions that integrate tax planning, healthcare considerations, and retirement income.
The key lesson here isn't just about account distributions. It's about recognizing that financial decisions don't exist in isolation. Your withdrawal strategy can impact everything from your tax bracket to healthcare costs, from Medicare premiums to Social Security taxation.
Each financial decision creates ripples that affect other areas of your financial life.
What works for one business owner might be suboptimal for another. A law firm partner with a large IRA but minimal taxable savings would need a completely different approach.
Someone with significant Roth assets would have different opportunities altogether. The key is understanding how these various accounts can work together in harmony to achieve your specific goals.
The most dangerous assumption in retirement planning isn't making the wrong choice – it's not realizing there was a choice to make in the first place. Many of the business owners I work with are surprised to learn about the flexibility they have in structuring their retirement income.
As you build your practice and plan for the future, remember that the simplest path isn't always the most advantageous. Just as you create custom strategies for each client's unique legal situation, your retirement distribution strategy should be tailored to your specific circumstances.
The time to start thinking about these strategies isn't when you're ready to retire – it's while you're still building and growing your assets.
Take a moment to evaluate your own portfolio. What do you see? If you're primarily looking at traditional IRAs and 401(k)s, you might be setting yourself up for limited flexibility in retirement. While these accounts offer attractive tax deductions today, they can force you into taxable income later when you might prefer more control.
Instead, consider whether you have a healthy mix of tax-deferred, Roth, and taxable assets. Though it might feel counterintuitive to pass up immediate tax deductions, having diverse account types can provide the kind of flexibility that made such a difference in the story I shared above.
Consider this: What opportunities might you be missing by taking the "obvious" approach to retirement distributions?
