Income tax planning should play an important role in your investment decisions at every stage of your adult life. Perhaps the most dramatic transitional stage of any investor's life is retirement. There are three distinct phases of this transition, each with its own tax-planning issues.
Actually, your tax planning strategies do not change much during this phase since you're still working and have not yet experienced a change in tax rates. At this point, your main concern is to maximize after-tax investment returns and to begin to reposition your portfolio to reduce risk and generate additional income, if necessary, to meet retirement income needs. And, if you're a corporate executive, your portfolio may include a disproportionately large amount of company stock. In this case, you may want to reduce your exposure to this issue by reallocating assets to create a more diversified portfolio.
Point of Retirement
The most important decision during this phase concerns how and when to take distributions from employer-sponsored retirement plans. For those receiving lump sum distributions, a decision must be made either to roll over the distribution into an IRA or to have the distribution taxed immediately using favorable tax treatment. If you turned age 50 by January 1, 1986, you can use five- or ten-year forward averaging for a lump sum distribution (with any pre-1975 amounts eligible to be taxed at a flat 20 percent capital gain rate, if elected.) Others can use five-year averaging only once, and only after they have reached age 59 1/2. The typical lump sum distribution often represents the most money an investor will receive at any one time. A poor decision could cost thousands of dollars and assistance from a professional is recommended.
This phase demands tax planning in many different areas. For example, …