Tax Planning for Retirement

The treatise describes the many actions retirees and their beneficiaries may take to reduce taxes during and after retirement years. For example, they may reduce taxes by:

• Taking a lump sum distribution limited to previous employee contributions. (See sections 2.08 and 10.11 of the treatise.)
• Planning the order and timing of (1) retirement plan rollovers and (2) IRA distributions. (Section 5.05[4] of the treatise.)
• Electing to make a charitable distribution from his or her IRA to a split-interest trust. (Section 5.05[8] of the treatise.)
• Eliminating withholding tax on a retirement plan rollover by making a trustee-to-trustee transfer. (Section 2.10[2] of the treatise.)
• Taking corrective action to avoid or minimize the excise tax on excess contributions to traditional and Roth IRAs. (Section 5.12 and 6.02[2][f] of the treatise.)
• Determining whether he or she qualifies for a hardship distribution from a 401(k) plan or a 403(b) plan. (Section 2.04[3] of the treatise.)
• Having a qualified defined benefit plan provide or purchase a “stretch” annuity for a young eligible designated beneficiary. (Section 8.03 of the treatise.)
• Carefully planning distributions from retirement plans to beneficiaries under the ten-year rules, to spread taxable income over the ten years in lower available tax brackets (not necessary for nontaxable Roth distributions). (Section 8.04[2][e] of the treatise.)
• Structuring an accumulation trust for minors in a way that avoids a short minimum distribution period caused by the presence of an older successor beneficiary. (Section 8.04[2][k][xii][E] of the treatise.)
• Informing a beneficiary of a qualified plan requiring use of the ten-year minimum distribution rule that he or she may be able to switch to life-expectancy distributions by rolling over the plan funds to an IRA. (Section 8.04[[2][f][iii] of the treatise.)
• Electing to defer tax on the distribution of employer stocks and bonds. (Section 2.09 of the treatise.)
• Electing a lump sum distribution under the U.S. military’s BRS System. (Section 14.02[1] of the treatise.)
• Carefully considering whether (and when) to transfer regular IRA or retirement plan assets to a Roth IRA. (Section 6.05 of the treatise.)
• Planning the order and timing of (1) retirement plan rollovers and (2) Roth IRA conversions. (Section 6.02[2][a][iii] of the treatise.)
• Giving a written self-certification to an IRA trustee that the he or she has permissible reasons for failing to satisfy the 60-day rollover requirement. (Section 2.10[3][c][iii] of the treatise.)
• Deciding whether and when to borrow from a qualified plan. (Section 2.18[9] of the treatise.)
• Refinancing to cure a default on a five-year qualified plan loan and avoid a deemed taxable distribution. (Section 2.18[8] of the treatise.)
• Considering whether to combine a nontaxable rollover to a traditional IRA with a nontaxable qualified rollover contribution of after-tax investment to a Roth IRA (Roth conversion), all from a single qualified plan distribution. (Section (Section 6.02[2][a][vii] of the treatise.)
• Determining whether to use an “applicable multi-beneficiary trust” (AMBT) for disabled or chronically ill beneficiaries. (Section 8.04[2][k][viii] of the treatise.)
• Electing a special computation of the required minimum distribution from an IRA or retirement plan that has partially annuitized its benefit. (Section 8.04[4] of the treatise.)
• Informing his or her spouse of the election to be treated as the participant in a tax-favored plan for minimum distribution purposes upon the participant’s death. (Section 8.04[2][c][iv][H] of the treatise.)
• Obtaining temporary use of retirement or IRA funds without paying tax or interest on the funds. (Sections 2.10[3], 4.05[3], 5.06[3], and 6.04 of the treatise explain this technique.)
• Carefully considering the tax aspects of remarriage or cohabitation. (See sections 1.02 and 1.03 of the treatise.)
• Diversifying IRA investments to include some precious metals of the specific types that are permissible IRA investments. (See section 5.03[2] of the treatise for a discussion of the IRA rules.)
• Deferring or accelerating income or deductions between tax years to minimize tax on social security benefits. (Section 1.02[7][a] of the treatise.)
• Choosing distribution alternatives that delay the taxation of required minimum distributions from retirement plans and IRAs. (Section 1.02[3] of the treatise.)
• Taking a partial lump sum distribution from a personally purchased annuity or a funded nonqualified plan after the annuity has started – rather than before. (Sections 10.10[6] and 16.05[5] of the treatise.)
• Determining when a personally purchased annuity is a useful supplement to, or substitute for, a tax-favored retirement plan. (See section 16.11 of the treatise.)
• Carefully considering whether a rollover of retirement plan funds to an IRA should include employee contributions.  (Section 1.01[3][e] of the treatise discusses the considerations.)
• Carefully considering whether to roll over employer stocks and bonds to an IRA. (Section 1.01[3][f] of the treatise discusses the factors to consider.)
• Electing the most favorable method for computing the tax on a lump sum distribution from a retirement plan. (Section 2.24 of the treatise explains the alternative computations.)
• Choosing the distribution methods and distribution periods  for retirement, IRA, and annuity  benefits  that maximize the deferral of taxes.  (Section 1.02[3] of the treatise, and Chapter 8 generally, explain the choices – and factors to consider.)
• Carefully considering whether to have the retiree’s qualified plan purchase a “qualified longevity annuity contract” (a QLAC) to alleviate some of the risk of outliving retirement benefits. (Section 8.04[4][d] of the treatise.)
• Avoiding the appointment of a trust beneficiary, or the reformation or decanting of a trust, if that would result in the required distribution of all the funds in a retirement plan held by the trust. (Section 8.04[2][k][v][C] of the treatise.)
• Providing that an applicable multi-beneficiary trust (AMBT) may terminate the trust interest of a disabled or chronically ill beneficiary if the existence of the trust interest would endanger the beneficiary’s means-tested government assistance. (Section 8.04[2][k][viii] of the treatise.)
• Informing a surviving spouse that, if he or she does not elect the life-expectancy distribution method before the end of the calendar containing the tenth anniversary of the retiree’s death, the spouse may be required to use the ten-year distribution rule. (Section 8.04[2][c][iii][D] of the treatise.)
• Taking the first required minimum distribution from his or her retirement plan or IRA in the tax year generating the lowest tax.  (Section 1.02[3][c] of the treatise.)
• Structuring distributions from retirement plans or IRAs to avoid the penalty tax on premature distributions.  (Sections 1.01[5], 2.04[2], 5.04, and 6.04[3] of the treatise.)
• Deciding whether to take penalty-free distributions from a tax-favored plan on the birth or adoption of a child.  (Sections 2.04 and 5.04 of the treatise.)
• Electing the most favorable method for computing the tax on lump sum payments of prior year social security benefits.  (Section 17.07 of the treatise.)
• Determining the percentage of disability insurance premiums he or she paid – to maximize the nontaxable portion of disability benefits.  (Section 13.02[4] of the treatise.)
• Qualifying for nontaxable VA disability benefits to replace taxable U.S. military retired pay. (Section 14.03[3] of the treatise.)
• Deciding whether to elect to defer tax on qualified stock issued pursuant to an equity grant by an eligible corporation. (Section 11.04 of the treatise.)
• Preserving the right of his or her surviving spouse to elect to own the retiree’s IRA or Roth IRA.  (Sections 1.03[3][f][v] , 5.08, and 6.07 of the treatise.)
• Preserving the right of beneficiaries to choose between alternative methods of distribution of retirement and IRA benefits.  (Sections 1.03 and 8.04[2] of the treatise.)
• Establishing separate IRA accounts for beneficiaries to maximize their tax deferrals. (Sections 1.03[4][h] and 8.06[3] of the treatise.)
• Designating a trust as the beneficiary of retirement or IRA benefits to provide better control of funds.  (Sections 1.03[3][k] and 8.04[2][d] of the treatise).
• Advising his or her spouse or other beneficiary to consider transferring regular IRA or retirement plan assets to a Roth IRA after the retiree’s death. (Section 6.02[2][e] of the treatise.)
• Devising an estate plan that reduces or eliminates federal estate taxes on retirement or IRA benefits.  (Chapter 20 of the treatise.)
• Making a charitable beneficiary designation that will eliminate taxes on retirement or IRA benefits.  (Section 1.03[7] of the treatise.)
• Using multiple trusts as IRA beneficiaries to maximize tax deferral. (Sections 8.04[2][k] and 8.06[4] of the treatise.)

For many more tax planning ideas and techniques, see the summary in Chapter 1 and the more detailed explanations throughout the treatise.