Viewpoints

Four Critical Decisions to Make at Retirement

Bob Bleier

Originally Published In:
BUSINESS STRATEGIES MAGAZINE
October 2004
Author: Bob Bleier

You've worked hard and saved prudently and now you're ready to cash out of your retirement plans and enjoy the good life.  But before you close the door for the last time, there are a few items to consider to make sure that nest egg is available when and where you want it.

Generally, a retiree is expected to begin withdrawing funds from retirement arrangements by April 1 of the year after he reaches age 70 ½. Failure to do this can result in a 50% tax on the amount that should have been withdrawn.

Select and Monitor the Right Investment Vehicles

Investment vehicles chosen for a particular portfolio strategy should be based on a few criteria:

Clear Goals
Do the dollars need to be available for the short term of the long term? You may wish this portfolio to act as an emergency fund, retirement plan, or education account. If liquidity is an issue (the ability to quickly turn an investment into cash without sacrificing principal) then certain investments should be avoided.

Your Risk Tolerance
Can you afford to lose some or all of your investments without any effect on your lifestyle? In general, risk is related to return: the higher the risk, the higher the potential for return; the lower the risk, the lower the potential for return.

Income Tax Consequences
Tax deferred, tax free and tax preferred investments or products should all be researched to determine if each, or a combination of each, are appropriate. Investments that offer capital gains and/or dividend distributions will create a tax due each April 15th. These distributions contribute to your overall investment performance so they must be considered when choosing where to place your dollars.

Economic Outlook
The state of the economy can change the mix of desirable investments. During times of inflation, intangible assets have tended to produce good results, and during periods of stable or declining inflation, tangible assets (stocks, bonds) have generally done well.

Managing the Investment
Many investors may not have the skill or knowledge needed to properly select or manage an investment. In many instances, professional advice may be available and should be considered.

Time distributions in a tax efficient manner

The tax benefits of various retirement planning vehicles have been structured to encourage taxpayers to save for retirement by deferring taxes until funds are actually withdrawn and used.  To insure that retirees actually use retirement savings (and pay income taxes) during retirement years, the IRS imposes penalties on taxpayers who take money out too soon or who take money out too late, for example, additional 10% penalty tax is imposed on distributions from qualified retirement arrangements (such as IRA's) before age 59-1/2 (or before age 55 for certain Company plans).  This can be a significant burden when an individual retires early (or becomes unemployed) before reaching age 59-1/2. 

Generally, a retiree is expected to begin withdrawing funds from retirement arrangements (and paying taxes) by April 1 of the year following the year in which he reaches age 70-1/2.  Failure to do this can result in a 50% tax on the amount that should have been withdrawn.  However, with proper planning, Required Minimum Distributions can be structured low enough to allow retirement accounts to continue to grow on a tax-deferred basis until the funds are actually needed.

Choose the appropriate distribution option

Many company plans allow a retiree to choose between an annuity and a lump sum distribution.  Each option has certain pros and cons.  Proceeds from a lump sum distribution can be invested in alternatives that provide a hedge against inflation.  The purchasing power of an annuity without a cost of living adjustment could be significantly eroded over long periods of time.

Finally, favorable tax rules apply when a lump sum distribution includes securities of the employer corporation.  Generally, the retiree is not taxed on the unrealized appreciation (excess of fair market value over the plan's cost or other basis) when the securities are distributed.  Thus, there are tax advantages to retaining direct ownership in employer securities rather than rolling them over to an IRA.

On the other hand, a company may be able to fund an annuity at a better price, which could result in better investment returns than an individual could obtain through his own investments. Also, for an unsophisticated (or uninterested) investor, an annuity avoids the risk of losing retirement savings through bad investments. 

Select an appropriate beneficiary

Retirement planning is not complete until the implications of a retiree's premature death are considered. It is important to periodically review the beneficiary designations to be sure they reflect the owner's intent, including the designation of a contingent beneficiary.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.