Making Cents: What To Do With Excess Retirement Funds
By: John P. Napolitano, CFP®, CPA, PFS, MST
For many of us, having too much money in a retirement plan sounds like a dream come true. But then again, for those who have done a great job saving throughout their working career, living with more in retirement savings than you need may somehow feel like a burden. The cause of this burden is frequently required minimum distributions and the complexities of estate planning for retirement benefits. There are ways to minimize this burden, but not all of them are intuitive.
For those over age 70 ½, you may do what is called a qualified charitable distribution (QCD). This means that you are taking money directly from your IRA and giving it to a qualified charity. This QCD must be made from an IRA, so if your retirement assets are in another type of retirement account, transfer it to an IRA and then make your QCD. The QCD maximum is $100,000 per year and this distribution does qualify for your required minimum distribution for the year.
The amount of the QCD never hits your income tax return as income and the gift to the charity is then not deductible as a charitable contribution. For many this is important because eliminating the income from distributions reduces your adjusted gross income, which is the threshold for many other costs and calculations. How much you pay in taxes on social security income, the deduction for medical expenses and the reductions and phase outs for itemized deductions and personal exemptions are all based on your adjusted gross income.
You cannot gift an IRA, but can accomplish a similar objective in a few ways. The first way is to simply take a withdrawal and pay the taxes now, gifting the net after tax amount. This sounds counter intuitive to many, but if the retiree finds themselves in a very low tax bracket compared to the beneficiaries, this may make sense. A second alternative is to convert a portion of your IRA to a Roth IRA, which will enable your next generation inheritors of your IRA to stretch tax free payments over their lifetime. However, with a conversion Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation. A third alternative is to use a trust for your IRA beneficiary to stretch the taxable payments over the life expectancy of your beneficiaries.
You may simply spend your retirement assets. In a large, taxable estate, it is more cost effective for your beneficiaries to inherit after tax dollars than an IRA balance. Intuitively, most want to defer the IRA withdrawals as long as possible. Naturally money will grow faster without the burden of taxation. Before acting on pure intuition, consider the totality of your lifetime income tax planning which would then bring into focus your personal income tax burden today and in the future, the tax rate for your beneficiaries and your ultimate estate tax burden.
A last alternative is to skip a generation. Passing by your already successful children for the grandchildren could be wise long term planning for all three generations.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.