Plenty has been written on how Baby Boomers may not be able to afford retirement, and while this is true for one group of retirees, there is another lurking concern for those with too many assets in their retirement accounts. For wealthier retirees the concern is:
Will my income, and the resulting income taxes, be too high once I am required to start taking distributions from my retirement accounts?
Corporate America has increasingly placed the retirement savings burden on their employees. It is rare to find many companies providing the benefits of a fully-funded pension plan for their future retirees. Most large companies have created 401(k) plans and other stock savings plans to help employees create their own retirement accounts for the future. It is not unusual to find today’s corporate retirees with over 75% of their wealth in their company plan, or their 401(k) plan or some other employer savings plan. Many of these company plans will eventually roll into IRA accounts. And as the retiree continues to age, this is where the too-much income problem really gets tricky.
Most of these IRA accounts will be traditional IRAs, and the owner will have required minimum distributions (RMDs) when the owner turns age 70 1/2. These RMDs will continue to grow as a larger percentage of the account while the owner ages. This combination of events, along with a growing tendency for the IRS to heavily tax high-income Americans, may create a surprise for unprepared retirees.
Following are examples of the percentage (%) of a traditional IRA account that will be required to distribute at various ages, and the corresponding RMD income for a $2 million and $5 million IRA.
You can see where these incomes will only continue to grow higher for even larger retirement accounts. And so, while many Baby Boomers are trying to figure out how to pay for nursing homes, these retirees will have a complex financial problem cropping up because they have more than enough.
Additionally, these amounts are typically not the retiree’s total income because they don’t even include additional income sources such as Social Security, non-retirement investment returns and other sources of income. Finally, most of the other common income tax deductions are less and less available to the retiree. They have all the income, but not many deductions!
And if that wasn’t enough, unfortunately, the IRS is increasingly penalizing high-income clients with additional surcharges, along with higher and higher income tax rates.
As a result, it is imperative for our clients with significant retirement accounts to proactively plan for the pending blitz of income they will face when RMDs begin. Although some may argue having too much income is not a very difficult problem to manage, paying an increasingly higher percentage of that income to Uncle Sam in the form of income taxes is never a desired outcome. We encourage all our clients to invest time with their financial advisors reviewing investment options, invest time with their accountants looking for tax reduction alternatives, and work with us to fully understand the law so they can create a viable plan for the future.
Our firm rarely works in isolation to create an effective estate plan. We have a network of professional advisors that we often partner with to make sure all the financial planning needs of our clients are met. It’s the most effective way to approach the complex needs of the people we serve.
We regularly provide a no-cost general review to identify potential problem areas when it comes to planning. This is not an elaborate, time-consuming, written summary in a fancy report binder. It is a personal, verbal walk through of your existing plan with an attorney. We will discuss potential problems and give you an upfront estimate of what it will cost if we feel that your plan needs to be updated. If your existing plan seems to meet your current needs, we’ll tell you that, too. We aren’t looking to update plans that don’t need it. Give us a call at 913-345-2323 to schedule a no-cost review today. We’re more than happy to speak with you.