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    Strategies for a Successful Retirement: Before, During, & After
    Strategies for a Successful Retirement: Before, During, & After
    Strategies for a Successful Retirement: Before, During, & After
    Ebook134 pages1 hour

    Strategies for a Successful Retirement: Before, During, & After

    By John Lau

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    About this ebook

    Preparation is the key to success in every stage of life, from grade school to college to entering the work force to marriage, and to retirement. The level of success depends largely on how well you prepare for the journey. This book is written to help retirees strategize and make the right choices in each phase of retirement -- Before, During & After.

    The first four chapters of the book are written to help lay down a solid foundation for retirement -- making the right choices about your company retirement plan; deciding when to take social security benefits, planning for healthcare and preparing a retirement budget.

    Once the foundation is secure and the financial landscape is in place, your retirement plan will need to be constantly monitored, pruned and maintained. Chapters five and six show how to plan for stable income and financial peace of mind during retirement while disinheriting the IRS from your retirement accounts.

    The final chapters are about estate planning. They address the need for an estate plan, identify the common mistakes that people make in the settlement and administration of their estates and show how to avoid them.
    LanguageEnglish
    PublishereBookIt.com
    Release dateApr 26, 2016
    ISBN9781456608125
    Strategies for a Successful Retirement: Before, During, & After

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      Book preview

      Strategies for a Successful Retirement - John Lau

      Author

      List of Figures

      Figure 1 – The Retiring Gap

      Figure 2 – Sequence of Returns

      Figure 3 – Pyramid of Investing

      Figure 4 – 3-Legged Stool Allocation Charts

      Figure 5 – Spend Regular Money First

      List of Tables

      Table 1 – Social Security Normal Retirement Age

      Table 2 – Retirement Budgeting Formula

      Table 3 – Determining Cash Flows from Rental Activities

      Table 4 – Retirement Budget Template

      Table 5 – After-Death Checklist

      Before Retirement

      1. What to do with Your Company Plan

      When you decide to retire, one of the decisions that you will face early on is what to do with your company retirement plan. Should you keep your company plan or roll it over to an IRA account? What is the right decision for you? The answer will be based partly on your company retirement plan, but mainly on your personal situation. There isn’t a one-size-fits-all solution. This chapter is intended to help you choose the most suitable retirement distribution option, for you.

      Pre-retirees need proper counseling to make the right decisions regarding their company plans. The complexity of retirement plans has increased over the years, and you should be fully aware of the pros and cons of the options that are available because the one that you choose will impact your retirement for years to come.

      Protection Against Creditors

      An important factor in making the roll or no-roll decision is the creditor protection consideration. For protection in non-bankruptcy cases, company retirement plans still offer the best protection against creditors. Most employer-sponsored plans, including 401(k)’s, are covered by the Employee Retirement Income Security Act (ERISA) and are completely protected from creditors (except the IRS and former spouses in divorce proceedings).

      IRAs are not covered by ERISA, so they do not have the same protection as company plans. However, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has expanded the protection for IRAs. Certain IRAs (rollovers from SEP or Simple IRAs, ROTH IRAs, individual IRAs) are now exempt up to at least $1.0 million in bankruptcy cases (adjusted periodically for inflation.) Other IRAs (rollovers from most employer sponsored retirement plans, 401(k)s, 403(b)s, etc.) are entirely exempt. For anything short of bankruptcy, protection is determined at the state level. If you roll over your company plan to an IRA and wish to keep the unlimited bankruptcy protection feature, it is advisable that you roll the money into a Rollover IRA account so they can be kept separate from your contributory IRA account (which is subject to the $1.0 million protection limitation).

      If asset protection is a concern, you would be well advised to consult an attorney.

      Instead of leaving your retirement funds in your employer-sponsored plan, you may also annuitize your account, or take a lump-sum distribution.

      Annuitization

      Annuitizing your retirement account means converting your account to an income stream. Payments may be for a period of time (e.g. five, ten, twenty years…), or for your lifetime. People choose the annuitization option either because they don’t want to manage their money, or they need a guaranteed income stream to live on, or both. The downside is that the annuitized payments are usually not adjusted for inflation, which will expose you to inflation risk. Furthermore, you would no longer have an asset. What if you have an emergency, or maybe you want to leave a financial legacy to your loved ones? A solution to the latter would be to purchase life insurance naming your loved ones as beneficiaries, but it still will not address the issues of inflation risk or providing funds for emergency needs. This is why rolling over your employer-sponsored plan to an individual retirement account (IRA) could be a better alternative.

      Rollover/Lump-Sum Distribution

      A lump-sum distribution is the complete withdrawal from your company retirement plan. You may take a lump-sum distribution any time after retirement, and not necessarily in the year that you retire.

      A lump-sum distribution can be taken in cash, in an IRA rollover, or transfer to another company plan. If taken in cash, there is a mandatory rule to withhold 20% of the distribution for federal income tax. Even if you roll over the distribution to an IRA later, the 20% withholding rule still applies, unless it is a trustee-to-trustee rollover.

      The term rollover can be confusing. There are two ways that a company plan can be rolled to an IRA – a 60-day rollover or a trustee-to-trustee rollover, they are both rollovers, but the tax consequences are very different.

      The 60-Day Rollover

      In a 60-day rollover, a check is made out to you, the plan participant (with a 20% federal withholding). Then you have 60 days, including weekends and holidays, to deposit the money into an IRA to complete the rollover. If you missed the 60-day deadline, you would have to pay tax on the entire distribution amount.

      The 20% mandatory federal tax withholding can be problematic, so even if you complete the rollover within 60 days, you would have to ‘make up’ for the withheld amount or taxes will be due.

      · · · · ·

      Example: Claire has a company 401(k) worth $600,000. She took a lump-sum distribution at retirement. Instead of directly transferring the money to an IRA, she had the plan custodian cut her a check. Because of the 20% mandatory federal income tax withholding, the check amount will be $480,000 ($600,000 minus 20% Federal tax withholding). The other $120,000 is remitted to the IRS as taxes withheld. Say Claire does not have any immediate use for the money, so she deposits the $480,000 into her IRA account within 60 days in order to avoid taxation on the distribution. This is all fair and square for the $480,000; however, her lump-sum distribution is $600,000, so in order to defer taxes on the entire distribution amount, she would have to ‘make up’ the $120,000 and deposit that back into her IRA in the 60 days grace period. Otherwise, she would have to pay taxes on the $120,000.

      · · · · ·

      Trustee-To-Trustee Rollover

      This is sometimes referred to as a direct rollover. With a trustee-to-trustee rollover, the rollover check is made out directly to the custodian of your IRA account (not to you personally). Sometimes the check is sent directly to the IRA custodian, or the check may be sent to you (but not payable to you). All you would have to do is deposit the check in your IRA custodian’s account to complete the rollover. With a trustee-to–trustee rollover there is no 20% federal withholding requirement.

      Partial Rollover Is Ok

      Rollovers are often referred to as lump-sum distributions which implies an all or nothing proposition. In truth, you may roll part of your company plan over (partial rollover) and leave the rest in the plan.

      The 10% Penalty

      If you take a lump-sum distribution at retirement and do not roll it over to an IRA or another qualified retirement plan, you will have to pay income tax on the distribution. And unless you have attained age 55 at separation of service from the company, there would be a 10% early withdrawal penalty tax at the federal level. State may impose its own penalty tax.

      There seems to be some confusion on the age 55 rule. Most people are familiar with the age 59½ rule where distributions from a retirement account after that age are exempt from the 10% early withdrawal penalty tax; but the age 55 rule applies to employer sponsored plans. If you separate service from your employer company at or after age 55, withdrawals from the company’s retirement plan are exempt from the 10% penalty tax. In order for the exemption to apply, the distribution must be tied to separation from service, or the penalty would still apply.

      · · · · ·

      Example: Jack takes early retirement at 55. He has a company 401(k) account of $500,000. Jack withdraws $50,000 from his plan to pay off some bills and roll over the balance to an IRA. While the $50,000 is taxable income to Jack, the 10% early withdrawal penalty tax would not apply since Jack is 55 at the time of separation from service.

      Assuming Jack withdraws the $50,000 from his company plan while still employed with the company, the 10% penalty would apply.

      · · · · ·

      Tax-Free/Interest-Free Short-Term Financing for IRA Owners

      While the 20% tax rule applies to lump-sum distributions from company plans, it does not apply to IRA distributions. The 60-day rollover exception, however, is still valid, and it presents a tax-free short-term financing opportunity for IRA owners.

      · · · · ·

      Example: George has a $50,000 IRA. He needs $30,000 to satisfy a short-term need. George can take the $30,000 from his IRA (no 20% withholding);

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