As of the end of last year, the typical new retiree had stashed away a bit less than $150,000 in employer-sponsored retirement accounts and IRAs. That’s a problem—those dollars won’t fund a lot of retirement spending.
 
At the high end of the spectrum, some retirees have a different problem, though they may not (yet) view it as such: their retirement accounts may be so large that they’ll need to do some serious planning to manage the ordinary income that’s about to come their way -- and eventually, to their children.

Don’t read this as an invitation to stop contributing to your 401k and IRA. Those who achieve multi-million dollar retirement accounts typically do so by contributing the maximum amount for decades, coupled with making savvy investment picks and receiving a generous employer match. If you are one of the lucky ones, congratulate yourself -- and start planning.

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First things first -- do you need to plan? A 70 year old taking his first minimum required distribution from a million dollar IRA would have to withdraw $36,500. A two million dollar IRA requires an initial distribution of $73,000, and so forth.  If your retirement accounts will likely require you to withdraw significantly more than you need to support yourself, start planning in your sixties. Before then, you likely can’t make accurate projections or take tax-efficient actions.

Most people leave the full-time work force earlier than age 70. Before then, many begin tapping non-retirement investment accounts or claiming Social Security benefits. This may not be the best strategy.  

After age 59-1/2, you can begin withdrawing IRA assets penalty free. Typically, every dollar that comes out is fully taxed as ordinary income. This is more onerous than taking assets from a taxable investment account (some tax-free return of capital, some tax-favored dividends and capital gains) or from Social Security (no more than 85 percent taxable). You may be able to mix and match taxable assets and your IRA to provide sufficient cash flow while keeping your tax bracket relatively low.

This has many potential benefits: you could hold off claiming Social Security benefits, allowing them to grow eight percent annually. You can take less from your taxable investments, leaving you more planning options in later years and perhaps benefitting your children when they inherit. You reduce your future taxable income without jeopardizing your future cash flow.  



Even better, incorporate your IRA planning into your overall estate planning. When your children inherit taxable investment accounts, the assets in those accounts get a brand new, date of death basis. Retirement accounts are treated differently: your beneficiaries are taxed the same way you are. If every dollar comes out to you as ordinary income, the same will be true for your children. Under the current rules, they’ll be able to stretch those distributions out over their individual life spans, but it all has to come out to them. This is not the case with a regular investment account, which affords far more tax planning. Thus, inheriting a $1 million stock portfolio can be far more valuable than inheriting a $1 million IRA.  

If feasible, take a gimlet-eyed look at your tax situation and your children’s earning potential. If they’ll be in a higher tax bracket than the post-retirement you, your family as a whole benefits by your taking IRA assets out during retirement and allowing your taxable assets to accumulate.  

An additional option is the Roth IRA conversion. If, after taking living expenses from your IRA, you still have room to run in your tax bracket, consider converting some of the IRA to a Roth. You pay ordinary income tax now, but future earnings are totally off the tax grid—for both you and your children. Roth conversions can be done a bit at a time, as it suits your tax situation.

Note:  Claire E. Toth, JD, MLT, CFP™, is Vice President of Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit. The full-length version of this article is available at:  www.ptview.com.

 
Point View Wealth Management, Inc. works with families in Summit and beyond, providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals. We are independent and fee only.  How can we help you?  Contact David Dietze (ddietze@ptview.com), Claire Toth (ctoth@ptview.com), or call (908) 598-1717 to learn how.

CNBC has named Point View to its list of the top 100 American fee-only wealth managers for both 2014 and 2015!  The full-length version of this article is available at:  www.ptview.com.