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 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. Required minimum distributions (RMD’s) and the complexities of estate planning for retirement benefits can be complicated. There are ways to minimize this burden, but not all of them are intuitive.
If you’re over age 70 ½, you may do a qualified charitable distribution (QCD). This is when you take money directly from your IRA and give it to a qualified charity. The QCD must be made from an IRA. 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 the distribution also qualifies for your RMD.
The amount of the QCD never hits your income tax return as income and the gift to the charity isn’t deductible as a charitable contribution. For many this is ideal because eliminating the income from distributions reduces your adjusted gross income, which is the threshold for many other costs and calculations. Amounts you pay in taxes on social security income, the deduction for medical costs, the reductions or phase outs for itemized deductions and personal exemptions are all based on your adjusted gross income.
You can’t gift an IRA, but can accomplish a similar objective in a few ways. The first is to simply take a withdrawal, pay the taxes now and gift the net after tax amount. This may seem counter intuitive but if the retiree is in a very low tax bracket compared to the beneficiaries, this may be wise.
A second option 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. Traditional IRA account owners should consider 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 as your IRA beneficiary to stretch the taxable payments over the lifetime of your beneficiaries.
You may consider spending your retirement assets. In a large, taxable estate, it may be 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 grows 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. Bypassing your already successful children for the grandkids may be a wise long term planning strategy for all three generations.
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 P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com.US Wealth Management, US Financial Advisors and LPL Financial do not offer tax advice. 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.