If you’re considering retiring, you have important decisions to make, and the best time to start thinking about them is now.
Your Social Security benefit is a good starting point. You should have a good idea of the benefit you will receive from the Social Security Administration’s annual updates.
Beyond that, how you’ll deploy your assets—your retirement plan balances, your business or real estate interests—to provide for your retirement income calls for some savvy planning. We’ll address here some of the financial decisions that you may find yourself facing.
Programming Pension Payouts
Traditional company pensions provide a lifetime annuity—fixed annual payments as long as you live. The payments are subject to income tax. If you’re married, your standard pension will be reduced to provide a continuing income for your spouse if they outlive you. But you may elect to receive higher payments for your life alone. This option may appeal to two-income couples whose husbands and wives have earned good pension benefits.
If your spouse is in failing health, choose higher benefits based on your life expectancy only and obtain added life insurance to serve as an income source for your spouse if needed.
Lump Sum Payouts
Benefits from 401(k) and other similar company retirement plans are commonly paid in a lump sum. Some pension plans also offer a lump sum option. Lump sum distributions are subject to income tax in the year received. Indeed, a withholding tax of 20% must be subtracted before you receive such a distribution.
Unless you plan to use the lump sum payout for some specific purpose in the next several years, you’ll probably want to postpone tax by having your distribution paid directly to an IRA (a “rollover IRA”). By making a direct rollover, you avoid having 20% tax withheld from your distribution. You also may roll over a lump sum distribution within 60 days after you receive it. But with this option, you must replace the amount withheld from your distribution. Otherwise, you must list the withheld amount as an item of income on your federal income tax return for the year the distribution is made.
Rollover IRAs are subject to the usual IRA rules: Taxable withdrawals can be made without penalty anytime after age 59 1/2. A regular program of withdrawals must begin once you reach age 72.
Whether or not a lump sum is rolled over into an IRA, devising an investment strategy requires careful, personalized analysis. See our investment management specialists for guidance.
Tax-Wise Ways to “Cash-Out”
When owners of successful businesses or profitable real estate investments retire, converting their holdings to cash may result in large (and taxable) capital gains. Two possible ways to avoid the tax bite:
Sale of closely held stock to an ESOP. If requirements are met, an owner may sell stock to the company’s employee stock ownership plan (ESOP) and reinvest tax-free proceeds in a diversified portfolio of marketable securities.
Sale through a charitable remainder trust. Owners of real property or other assets that have appreciated in value often wish to make charitable bequests in their wills. But there’s another way to benefit charity. They may transfer the appreciated assets to a charitable remainder trust, reserving a life annuity. The trustee of the trust then may sell the appreciated assets and reinvest the entire proceeds, undiminished by a tax on the realized gain, in income-producing securities.
The first steps in formulating a retirement plan are taking a thorough inventory of your assets, calculating income, and measuring expenses and spending needs. With your goals in focus, we will work with you to create a personalized retirement plan and investment strategy to guide you into a secure retirement so that you can reap the benefits of your life’s work. Learn more at: https://www.lptrust.com/our-services/retirement-planning/.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or info@lptrust.com.
© 2022 M.A. Co. All rights reserved.
Any developments occurring after July 1, 2022, are not reflected in this article.
This newsletter is provided for informational purposes only.
It is not intended as legal, accounting, or financial planning advice.
Laurene Brooks joined Legacy in 2004, shortly after the company’s inception. She earned undergraduate degrees in journalism and Spanish, and her Juris Doctor (JD) designation from Marquette University. Laurene has over 30 years of experience in law and relationship management. In addition to assisting clients with financial management and estate planning, Laurene is Legacy’s senior fiduciary officer. In addition, she was a member of the Real Property, Probate, and Trust Division of the Wisconsin State Bar for 10 years and served as chair.
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