Tax Planning Critical to Save Retirement Income

By Rosen, Jan M. | THE JOURNAL RECORD, March 25, 1989 | Go to article overview

Tax Planning Critical to Save Retirement Income


Rosen, Jan M., THE JOURNAL RECORD


When it comes to taxes, retirement is no time to take it easy.

Indeed, even financial planning for retirement requires a great deal of work, and taxpayers this year will face several important decisions.

In filing 1988 returns, taxpayers with substantial amounts in pension plans must decide on the tax treatment those funds will receive.

Middle-income taxpayers can still lower their 1988 tax bills by making contributions to an Individual Retirement Account and certain similar plans.

``A lot of times in retirement, money is more controllable than at other times in life, but you have to make careful projections and look at several scenarios,'' said Joel S. Isaacson, a certified public accountant who is director of personal financial planning for Weber Lipshie & Co.

An area critical this year for anyone who had more than $562,500 in qualified retirement plans as of Aug. 1, 1986, is what is known as the grandfather election.

The Tax Reform Act of 1986 imposed a 15 percent excise tax on any ``excess distributions'' from the plans. Those who make the election, which lets them escape that tax, hope their overall tax bill will be lower in the long run, although it is a judgment call.

Qualified retirement plans include certain pension plans, individual retirement accounts, Keogh plans and tax-sheltered annuities.

The 15 percent excise tax will be imposed when all distributons received during a single year exceed the ``allowable distribution amount,'' which is the greater of $150,000 or $112,500 inexed for inflation - which amounts to $117,529 for 1988.

But those making the election will forgo the right to the $150,000 limit and will have to use the indexed amount until it passes $150,000. Another aspect that makes the decision extremely complicated is that there are also estate tax consequences. The excise tax may be imposed if there are large amounts left in the plans.

``A major item for people is getting the present value number from their defined benefit plans,'' said Mike Klein, national director of tax consulting for Price Waterhouse & Co. in New York.

Many pension plan administrators will be so overwhelmed with requests that the taxpayers will have to file for an extension on their returns, because the grandfather election must be made by the due date of this year's return.

Once they have the numbers, taxpayers should consult a professional before making the election. The professional will have to project a number of factors, including how long the retiree is likely to live, the inflation rate and the likely direction of taxes. In balance, Isaacson said, he is finding that most clients who can control how their retirement funds are invested, by rolling them over into an IRA, should make the election, but each case must be studied individually.

Those who retired at the end of 1988 and took pension payments in a lump sum had 60 days to decide whether to roll them over into an IRA - so most have a few days left. If they decide not to take the IRA, they must decide whether to use 5-or 10-year forward averaging, which enables a taxpayer to spread the liability over several years. Those nearing retirement must decide between those options or whther to take an annuity.

Some tax professionals, believing that rates are bound to rise, given the federal budget deficit, are advising clients to pay the tax now.

But Isaacson said: ``I lean toward the rollover. If you pay tax at 28 percent, you've only got 72 percent of your money working for you. If you roll it over, it can grow tax-deferred until you're 70 1/2. Then you can start pulling it out.''

Tax rates would have to rise very substantially to offset that advantage, he believes. But it is critical to meet with an adviser and develop a payout plan, he said. …

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