By Russolillo, Raymond G.
The CPA Journal , Vol. 67, No. 9
Over the years, much has been written and many retirement plans devised in the so-called "MBA" mode. CPAs and other financial planners devise all sorts of elaborate methods to keep tax deferral going well over 50 or 60 years without ever considering the actual needs and goals of the client. This theoretical approach often "puts the cart before the horse," offering solutions to problems that have no practical relevance. This outcome is perfectly understandable because distribution planning ranks right up there with estate planning in terms of providing sophisticated solutions for seemingly simple, yet unexpectedly complex problems. In fairness to practitioners, the complexity of the tax rules coupled with the phenomenal potential for long-term growth through extended tax deferral virtually requires sophisticated analysis to inform the client of what he or she is missing if the "wrong" choice is made! All too often, practitioners quantify solutions that look good on paper but have no practical appeal. There is a need for a pragmatic approach to retirement planning. Presented here is a framework for the analysis of retirement plan assets and distribution options while considering the overriding objectives of the plan participant.
Cash Flow Needs. Retirement plan assets have ballooned in recent years. For the average employee or selfemployed individual, retirement assets consisting of pension plans, 401(k) and 403(b) plans, individual retirement accounts, tax deferred annuities, and the like, make up an increasingly large, if not dominant, portion of his or her net worth. Therefore, it has become increasingly important for planners to try to permanently optimize those characteristics that make investment in such plans so attractive. When reviewing retirement assets, however, advisors need to consider an overriding question: "What type of cash flow is needed for his or her living expenses?" Before we can even approach the analysis of the retirement assets and distribution options, we need to evaluate cash flow needs. As mundane as it sounds, budgeting and goal setting is much more important than sophisticated but impractical plans. In fact, we find the vast majority of Americans need to dip into their retirement accounts sooner rather than later to maintain any semblance of their preretirement lifestyles in retirement. So, the question is, do fancy tax strategies really help these folks? Maybe, but then again, maybe not.
Beneficiaries. Next, the analysis turns not to lifetime distributions, but to testamentary dispositions. The advisor needs to understand the cast of potential characters who may be deemed worthy of being named a beneficiary of a qualified plan. It is dangerous to assume who the beneficiaries should or should not be. There are pros and cons for selecting spouses, children, grandchildren (or trusts for their benefit), other relatives or friends, or even charities or charitable trusts (see Exhibit 1). Each of these possibilities offers distinct advantages and disadvantages when it comes to minimum distribution calculations and ultimate disposition at death. But all of these planning possibilities are rendered meaningless if the realities of family situations are ignored. For example, the taxpayer, who happens to be a grandfather, is not on speaking terms with his grandchild. Does it make sense to suggest naming that grandchild as a beneficiary if there is no chance the advice will be followed? The advisor must figure out the lay of the land first, then gather the ages of those potential beneficiaries who may, indeed, land on the taxpayer's financial planning radar screen.
Client-Specific Data The next step is to gather together all of the data needed to analyze the taxpayer's situation. This includes copies of the latest statements from IRA plans; 401(k) and 403(b) plans; money purchase, profit sharing, and other types of defined contribution plans; defined benefit plans; Keoghs; and SEPIRAs. …