With great power comes great responsibility.

Individual retirement accounts are a powerful wealth accumulation vehicle, with Americans now owning $19 trillion in such assets, per the Investment Company Institute. But what can’t be denied is the complexity that comes with spending down those accounts in retirement, and income taxes are just the beginning. Factor in required minimum distributions, early withdrawal penalties and the potential for some mistakes to entirely undo the accounts’ tax-exempt status, and it’s a lot for clients to manage. Advisors simply must be well-versed in the rules to effectively serve their clients, according to Denise “the IRA Whisperer” Appleby, founder and CEO of Appleby Retirement Consulting. Those who aren’t could risk serious conflict with the IRS.

“I advocate for screening incoming clients for serious unchecked IRA mistakes, because they’re out there,” Appleby said. “It can be a huge headache to address them, to the point that you probably don’t want these people as clients.”

Caught Out

One common misstep occurs when IRA owners make early withdrawals. Many advisors are aware of the 10% early withdrawal penalty assessed on top of normal income taxes. They overlook, however, how the actual payment of the penalty happens, as many assume the IRA custodian sends the required amount directly to the IRS, Appleby said.

IRA custodians do not automatically calculate, deduct or send the 10% early withdrawal penalty to the IRS on your clients’ behalf, she warned. The custodian may automatically withhold a flat percentage (typically 10% to 20%) to cover income taxes. This goes toward the individual’s overall tax burden, however, not the specific 10% penalty. Instead, the custodian reports the total distributed amount to the IRS (and to the taxpayer) using IRS Form 1099-R.

“The IRA owner gets real sticker-shock from this added payment during tax season,” Appleby said. “They are often in a tough spot, because they probably took an early withdrawal because they needed liquid funds in the first place.” In fact, Appleby has seen some people resort to tapping home equity to settle unexpected tax burdens tied to early IRA withdrawal penalties. Other traps include:

• Individuals are limited to one indirect IRA rollover per 12-month period, though unlimited custodian-to-custodian rollovers are permitted.
• Clients cannot directly convert a required minimum distribution into a Roth IRA.

Don’t Jump the Gun. The IRA rules are nothing if not strict, and even a single day can make a difference in some cases. “Many people are out there waiting eagerly for age 59.5, when they can make penalty-free withdrawals,” Appleby said. “Be careful, because withdrawals made even one day early can be subject to the penalty.”

Another area for serious diligence is around Roth conversions. By IRS rules, the client’s total yearly RMDs must be fully withdrawn from their traditional accounts before they can perform any Roth conversions. Furthermore, the RMD money itself cannot be used to fund the conversion.

Advisors who don’t offer estate planning may find themselves written out of the will.

Many independent advisors are lagging when it comes to their estate planning offerings, according to a recent report from consulting and research firm The Oasis Group. The findings highlight the ongoing shift away from the traditional, document- and attorney-driven estate planning process to one led by the advisor. The ongoing Great Wealth Transfer has also upped the ante with thousands of Gen Xers and millennials inheriting wealth. There’s a huge risk in losing those clients, said John O’Connell, founder and CEO of The Oasis Group.

“There’s still $68 trillion that’s going to move, and that’s going to move primarily via someone dying and a will,” he said. “Many of the firms out there, if they don’t have the capability they need … they’re going to [watch] that money walk out the door.”

Estate of Play

There are a wide range of estate planning products out there that can digitize trust documents and create what-if scenarios based on them. Some of the best platforms are also able to navigate complex circumstances, such as clients who want to skip a generation when delineating heirs, according to the research. But if a firm doesn’t have the capacity to dramatically expand its estate planning services, it can also begin offering a more specialized capability, charging on a per-plan basis. “The first thing you should consider is, ‘What model do I want?’” O’Connell said, adding that some advisors only do a handful a year.

According to a recent report from Business Research Insights, demand is growing:

• The global estate planning services market is estimated to grow from its current $114 billion to $171 billion by 2035.
• In the US, 55% of the population has an estate plan, but the proportion rises to 67% for high-income households.

Est(AI)te Plan. Firms can also begin to train their advisors on estate planning by launching internal tools, which the $58 billion firm Carson Group recently did. Platforms incorporating AI are also gaining momentum, with the AI-powered estate planning firm Wealth.com raising $65 million in a Series B funding round last month. Other popular choices were Luminary and Vanilla, according to the research. But some types of AI can be risky, O’Connell said, especially if clients prompt the new tools for advice.

“We’re at this really interesting crossroads, where clients are not going to be coming to [advisors] for all the answers anymore,” he said. “They’re going to be doing more research on their own, and as much as an advisor can get ahead of that, the better.”

Keep calm and carry on.

Americans aren’t pulling back on retirement savings, despite market volatility fueled by the war in Iran, tariff uncertainty, rising oil prices and a host of other economic concerns. They’re actually leaning in. Fidelity reported IRA contributions surged 29% year over year in the first quarter, a record increase. Total savings rates for both 401(k) and 403(b) accounts also reached all-time highs.

Inflation pressures are still hitting consumers at the gas pump, the grocery store, the doctor’s office and, well, pretty much everywhere. But Americans appear increasingly confident in their ability to prepare for retirement. “While it can be tempting to make changes to retirement savings during market volatility, it is positive to see participants stay the course,” Sharon Brovelli, president of workplace investing at Fidelity Investments, said in a press statement.

Balancing Act

Average account balances across IRAs, 401(k)s and 403(b)s dipped slightly from the previous quarter, but the longer-term trend remains positive, suggesting investors haven’t been overly shaken by geopolitical turmoil or market swings. “Consumers appear to be regaining confidence, particularly those who have remained employed and benefited from stronger markets, which has created a tailwind for retirement savings,” said Eric Berlin, founder of Edgewood Wealth Management. He noted that daily inflation pressures are still a hurdle, and clients are just adapting to higher prices rather than feeling relief.

According to Fidelity’s data:

• The average IRA balance reached roughly $131,400 in the first quarter, up 7% year over year.
• The average 401(k) balance climbed 11% to $141,000, while 403(b) balances rose 13% to $130,000.

The report also highlighted the growing role of company stock plans. When employees own a stake in the businesses they work for, retention tends to improve, and 43% of participants become first-time investors through those programs.

Work It Out. Today, nearly three out of four Americans say they have a plan in place to reach their retirement goals, according to other Fidelity research released earlier this year. Some of that optimism is tied to a changing view of what retirement actually looks like. For many people, fully leaving the workforce at 67 is no longer the only definition of retirement; they instead say they want to retire “when it feels right.” While there are affordability concerns, many Americans intend to keep working because they enjoy it or want to continue building wealth later in life.

Vacations are cool too, you know.