Tax Planning for Retirees

Tax Planning for Retirement

The treatise describes the many actions a retiree may take to reduce taxes during retirement years. For example, a retiree 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.)
  • Eliminating withholding tax on a retirement plan rollover by making a trustee-to-trustee transfer. (Section 2.10[2] 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 new 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, all from a single qualified plan distribution. (Section (Section 6.02[2][a][vii] 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][b] 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.)
  • 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.)
  • Preserving the right of his or her surviving spouse to elect to own the retiree’s IRA or Roth IRA.  (Sections 1.03[2][c], 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] 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[5] 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][d] 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.