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
In filing 1988 returns, taxpayers with substantial amounts in
pension plans must decide on the tax treatment those funds will
Middle-income taxpayers can still lower their 1988 tax bills by
making contributions to an Individual Retirement Account and certain
``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
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
``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
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
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. …