Academic journal article Journal of Accountancy

Making the Right Decisions at Retirement: Four Tax and Financial Planning Pointers

Academic journal article Journal of Accountancy

Making the Right Decisions at Retirement: Four Tax and Financial Planning Pointers

Article excerpt

The years immediately before and after retirement pose some interesting tax and financial planning opportunities for both planners and clients. This month, Kenn B. Tacchino, director of the Tax Institute, Widener University, Chester, Pennsylvania, and Barton C. Francis, CPA, CFP, partner of Shellenhamer & Co., Palmyra, Pennsylvania, describe some options financial planners must address to ensure clients a financially secure retirement.


Clients planning to take annuity distributions from a qualified retirement plan have two important decisions to make. The first is familiar to most CPAs--what type of annuity best suits the client's needs. The second decision--which annuity carrier to choose--often is overlooked.

Planners and clients may assume wrongfully the client is stuck with the annuity company sponsoring the plan. If, however, the plan provides a lump sum distribution option, CPAs can help clients shop for an annuity from another company.

The process is relatively simple. First, quotes should be obtained for the type of annuity the client has chosen. If an outside carrier provides a larger monthly benefit, all that needs to be done is to roll the client's account balance into an individual retirement account funded by the new carrier's annuity.

Since a rollover is being used, the tax consequences will not be any different than they would have been had the plan annuity been elected. What's more, this technique gives the planner an opportunity to shop for the most stable and secure annuity provider, which has added importance in today's environment of failing insurance companies.


Employer-provided qualified plans typically stipulate the type of distribution a client will receive. The normal form of benefit for a married individual is a joint and survivor annuity of not less than 50% nor greater than 100%. One strategy for married individuals is to elect out of the normal joint and survivor benefit with the spouse's written consent.

This election to have benefits paid as a life annuity increases the individual's retirement income significantly. If at the same time life insurance is purchased (or kept in force) on the life annuitant, the spouse's future also remains secure. This makes sense if net disposable income after the insurance cost is greater than the joint and survivor annuity option.

If the spouse dies first, the insurance can be canceled, leaving the retiree with more disposable income. If cash value life insurance is used, additional funds also may accumulate.

Example: Joe Jones (age 65) and his wife Sally (age 62) are eligible to receive a $1,500 benefit based on the $200,000 in Joe's retirement plan (100% joint and survivor annuity). If they elect to receive a life annuity based on Joe's life, they will receive $325 more each month ($1,825 total). The extra $3,900 a year represents a 22% increase in annual income.

If the Joneses can purchase (or keep in force) life insurance on Joe that would provide a death benefit equal to the purchase price of a life annuity comparable to the survivor annuity for Sally for anything less than $3,900 a year, they will increase their retirement income and improve their financial security.

Before this planning technique is adopted, it is imperative clients understand the potential weaknesses. If the pension plan makes cost-of-living increases or if the employer occasionally makes ad hoc increases, a much larger amount of life insurance may be required to provide the survivor with a similar income.

If universal life insurance or a vanishing premium are part of the proposed (or existing) insurance, the policy may not be adequate if interest rates fall as they have in recent years. The principal required to purchase a comparable annuity for the survivor will be much greater during periods of low interest rates. …

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