Strategies to Make the Most of Your Retirement Assets
“Confidence comes from being prepared.” —John Wooden
A successful retirement plan does not happen overnight nor can it exist without proper preparation.
A client once asked me, “How can we properly prepare for retirement if we do not know what the rules will look like when we retiree?” This was a very valid question and one that financial planners, CPAs and attorneys have had to battle for years. No matter how strong the plan or how many hours were spent analyzing the numbers there are just certain things we cannot control.
For instance, those that retired at the end of 2007 never could have imagined the vast destruction of wealth the “Great Recession” caused in just two short years. There was no Siri or Alexa to forewarn you or your plan of the 50% drawdown in U.S. (SNC:SPX) equities and the decimation to the rental properties you thought were rock solid.
Even most of the talking heads on TV, the big banks, wirehouses, insurance companies, rating companies and independent investment advisors did not get it right. Though, the majority of individuals that were able to weather that storm and land on their feet had a plan and stuck to it. They proactively created strategies prior to the unforeseen economic collapse that allowed them to limit the emotional response that could derail your vision of a successful retirement.
Almost a decade removed from the last major global contraction the world has changed vastly. Though we have come a long way from the depths of 2008, many of us have a feeling of trepidation as we move well into the middle of the twentytens. Technology is evolving beyond a warped speed and the news cycle is 24 hours a day, seven days a week, 365 days a year. And now in add into the mix the Trump effect and it’s enough to make the most even keeled individual a little shaky.
We have also witnessed astonishing moves in interest rates over the past 6 months. After bottoming at a low of 1.35%, the U.S. 10Year Treasury yield had its largest single move since the credit crisis of 2008, at one point up 91% from its low. Following the election, global bonds had their greatest twoweek loss since 1990. The fourth quarter saw the Barclays U.S. Aggregate Bond Index have one of its worst quarters since 1981.
The speed in which the new administration is bringing forth new orders and slashing existing is nothing short of astonishing. One of the major themes in Trump’s campaign was to lower taxes on both the individual and corporate level. As we have seen in just the first few weeks, Trump is making good on many of his campaign promises and cutting taxes fits perfectly into his populist view that it will spur growth.
The proposed tax plan could provide a benefit for you many of you, especially retirees. But like anything there is no free lunch; reducing taxes would increase the federal deficit and if the benefit of trickledown economics does not come to fruition our national debt could soar (while interest rates spike). Stagflation could rear its ugly head once again and taxes would have to increase. Thus, let’s discuss a few strategies that could help you today avoid higher taxes in the future.
Increase in standard deductions and eliminate personal exemptions:
• Increase of standard deduction to $15,000 for single
• Increase of standard deduction to $30,000 for single
• Eliminate personal exemptions
For many retirees the increase in standard deductions will provide a savings to the amount they owe their business partner Uncle Sam. One of the pitfalls of successfully saving for retirement and eliminating debt is the average retiree is not able to itemize their deductions. Additionally, the majority of investable assets held by many are in qualified retirement accounts (401(k), IRA, SEP IRA, TSP, 403(b)).
Although retirement accounts work well to reduce your taxes during your working years they become a huge tax liability as you leave the workforce. Withdraws from retirement accounts are taxed as ordinary income and can increase the amount of taxes you pay on Social Security. Required minimum distributions (RMDs) kick in at 701⁄2 and require you to withdraw an increasing percentage each year based on the IRS life expectancy table . In the future, if the government has to increase taxes one of the first doors they may knock will be these type of accounts.
One strategy to review if standard deductions go up is the benefit of converting a portion of your qualified retirement asset to a Roth IRA. Monies converted to a Roth IRA are taxed at today’s rates and once inside the Roth can continue to grow taxdeferred, are taxfree when withdrawn and have no RMD requirement. Thus, you are paying more in taxes today with the hope that it will be a lot less in the future. Make sure to work with your CPA and/or financial planner to review the pros/cons of this strategy.
QLAC (Qualified Longevity Annuity Contract)
Another option to avoid paying higher taxes in the future is to position a portion of your qualified money into a QLAC. A QLAC could give you a lifetime income with the option to delay receiving payments until as late as age 85, therefore allowing you the ability to postpone a portion of your required minimum distributions (RMDs).
The QLAC was actually named after an IRS ruling regarding longevity annuities and allows the use of $125,000 or 25% of your individual retirement account (IRA), whichever is less, to fund it. Also, this ruling says when qualified assets are used to fund an annuity, that amount can be excluded from an RMD calculation. So, for example, if you have an IRA with $500,000 in it, then fund a $125,000 QLAC, your RMD calculation would be based on $375,000. The QLAC works a bit like your Social Security payment, providing an income stream for life starting at a certain date.
How do you know if a QLAC is a good fit for you? Some questions you may want to ask yourself if you’re nearing age 701⁄2 are: •Do you have enough resources outside of your IRA?
• Are you interested in decreasing your taxable income?
• Can you comfortably cover your expenses without your RMD?
• Do you want guaranteed income for life?
• Delay Social Security: Bridge the gap
If tax rates go down and standard deductions increase; delaying your Social Security benefit could prove to be a solid longterm tax play. It is no secret that your Social Security benefit increases at 8% each year until age 70. Historically, Social Security has provided a hedge against inflation with its cost of living adjustment. Also, maxing out your Social Security benefit is an insurance policy against longevity while also providing your spouse the ability to continue the higher benefit upon death.
The key to utilizing this strategy is having enough assets to bridge the gap. Thus, if tax rates go down it may behoove you to ust your retirement assets to provide the income to meet your annual expenses. You can use the decrease in the tax brackets and the increase in standard deductions to your advantage.
Be proactive in your planning. I recommend getting with your trusted team of professionals soon to discuss the abovementioned strategies. Utilize financial and tax planning software to review different scenarios and how they could affect your longterm plan. Do not put your head in the sand but ask the questions, do your research and implement. These is no better time than the present to plan for the future.
Andrew Rafal is founder and president of Bayntree Wealth Advisors and a member the Ed Slott Elite IRA Advisor Group, an organization of financial advisers dedicated to the ongoing study and mastery of advanced IRA financial planning strategies. For more information, please visit www.bayntree.com.
Bayntree Wealth Advisors does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.
Investment advice offered through Bayntree Wealth Advisors, LLC, a registered investment adviser. Insurance services offered through Bayntree Planning Group, LLC .
This article was originally published on Retirement Weekly.
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