Explains, in layman's terms, the complexities of tax codes governing retirement savings and offers strategies for protecting and making the most of one's assets.
INTRODUCTION
PLAYING THE "BACK 9"
"Combined, income and death taxes could boost what your kids pay on the remainder of your 401(k) [and IRA] to more than 80 percent."
-The Wall Street Journal, editorial page, February 25, 2002
In the not so distant past, the issue of protecting retirement savings rather than investing for retirement might have been considered putting the cart before the horse.
Not any longer.
Today, Americans have invested trillions of dollars in retirement plans, turning them into the biggest, most valuable asset they own-often worth more than even their homes. As a result, savings protection has become the name of the retirement plan game.
Most, if not all, retirement planning strategists, however, focus on why you should save for retirement and how to grow your money through a variety of investment vehicles.
That's valuable information, but it's not enough.
Look at it this way. What good is making even a 50 percent return on an investment if, at the time of withdrawal, taxes will step in to claim 70, 80, or maybe even 90 percent of it?
Think of it like coming down the stretch of the U.S. Open Golf Championship. The "Front 9" is where you position your lead by building up your assets; holding onto your lead-i.e., protecting your assets from excessive taxation-is the "Back 9" where, ultimately, you win or lose.
Crucial Component
This book addresses the critical issue that every other retirement-related and tax-related book on the market ignores: protecting the assets you've spent a lifetime building from excessive taxation. No single factor is more significant to your living the lifestyle you've been saving all of your life for, or to passing your hard-earned savings on to those you love.
Why is this component so crucial?
Due to a complex combination of distribution and estate taxes that kick in at retirement or death, millions of you are at risk of losing much-perhaps even most-of your retirement savings.
Already happening now, this dire turn of events will put a huge financial burden on you, your children, and on society as the ranks of the retiring and already retired swell to historic proportions in the coming years when the retirement savings time bomb explodes (see Chapter 1).
And so, the overriding purpose of this book is to give savers such as you the knowledge and the tools to defuse that bomb on your own-or with the help of your professional financial advisor-before detonation occurs.
Complex Web
I'll expose the complex web of dark secrets and traps in the tax code governing retirement savings in layman's terms, and I'll present, for the first time, an easy-to-use plan for helping the millions of you who are at risk to save a fortune in retirement income-income that might otherwise be lost to you and your families forever.
I'll deal with all aspects of IRA distribution planning, which encompasses virtually any type of retirement account you might have-401(k), 403(b), 457 Plan, SEP-IRA, SIMPLE IRA, Keogh, corporate pension plan-since virtually all retirement money is distributed according to what is commonly referred to as the "IRA distribution rules." These are among the most complicated rules in the entire U.S. tax code.
I'll go beyond the tax rules to provide easily understood explanations of the planning opportunities available and clear answers to some of the most perplexing and frequently asked questions ("I know the rule says X, but how can I accomplish Y without problem Z?").
I'll cut through the complexities of these rules and make them easy to grasp so that you'll be able to secure your retirement nest egg from being decimated by taxes, and you can keep your savings in the hands of your family, not the IRS.
In addition, if you're already a knowledgeable professional financial advisor, I will give you the tools to better guide and communicate with your clients, thereby attracting and retaining more assets under management, the key to growing your business.
A Total Solution
This book will help you devise and implement a simple, workable strategy to protect your retirement assets and keep your hard-earned money in the family-and growing-for generations.
My strategy grew out of my more than 20 years of experience "in the trenches" as a CPA preparing tax returns, and has evolved over my years on the circuit as a keynote speaker, teacher, and coach to consumers and professional financial advisors. I have conducted more than 500 seminars and workshops during the past five years, honing my action plan into one that works for anybody with an IRA, 401(k), or other retirement account-from hardworking folks such as teachers, doctors, and CPAs who have accumulated modest but still substantial retirement assets, to high-net-worth corporate executives and entertainers.
The result of my efforts is a total solution, one that you don't have to be a tax expert to achieve or to benefit from, regardless of what the stock market and economy are doing. It is a solution that will show how to
* Protect company stock owned in a 401(k).
* Make the most of retirement savings.
* Save a fortune in excessive, often needless taxation.
* Pass more assets on to loved ones and other beneficiaries.
* Keep retirement assets in the family for decades, even generations, with minimal or no taxes.
* Get more bang for your buck from your financial advisor.
* Expand knowledge of retirement distribution planning.
* Tap retirement funds for emergency cash-without paying a big tax penalty.
* Take advantage of the latest tax law and IRA rule changes.
* Integrate a retirement account with an overall estate plan to create the perfect estate plan.
* Avoid falling into tax traps with inherited IRAs or other retirement accounts.
* Protect retirement accounts from creditors, divorce, bankruptcy, lawsuits, or other problems that could expose them to confiscation.
As you read each chapter, keep in mind what I wrote at the outset of this introduction: Retirement planning is like a golf tournament. Building assets is just part of the game-and only the "Front 9," to boot.
There are nine more holes left to go in the equally, and perhaps even more, tortuous "Back 9"-the final holes where holding onto the assets you've built up becomes the biggest challenge of all.
Remember, where taxes are concerned, it's what you keep that counts!
ONE
The Crime of the Century
"There was a time when a fool and his money were soon parted, but now it happens to everybody."
-Adlai E. Stevenson (1900-65), presidential candidate and U.S. representative to the United Nations
Let me tell you about Ann, a woman with a nest egg consisting mainly of her 403(b), a tax-deferred retirement account for employees of nonprofit entities such as schools and hospitals. A widow, she was retired from her job of 30 years as a New York City schoolteacher. Ann's sole wish at the end of her life was to leave her entire savings to her two children: Jessica and Tom.
When Ann died suddenly in 2000, just two years into her retirement, Jessica and Tom came to me for advice. They explained how they'd been brought up in a modest, middle-class home where the emphasis was on living within one's means and always saving for a rainy day. They were amazed that although their mom, being a teacher after all, was clearly not a rich woman, she had, during 30 years of disciplined saving, accumulated more than $800,000 in her retirement account!
As Jessica and Tom both had good jobs with decent incomes, I suggested that they try to delay receiving that money since any distributions taken now would be subject to income tax, and they were both in high brackets. I explained that by "stretching" the distributions from their mom's 403(b) over their own lifetimes (Jessica was 40, and Tom was 36), the $800,000 could compound tax-free into an even bigger fortune as I'm sure Mom would have liked.
That was the good news.
However, as I learned more about the arrangements their mother had made-or, rather, had not made-I then had to give them the bad news: They wouldn't be able to take advantage of this option.
From Bad to Worse
Although Ann had never lived like a wealthy woman, according to our tax system, her combined estate of $1.2 million (her house, some minor savings, and other personal property, plus the $800,000 retirement plan) was large enough to be subject to estate tax.
Furthermore, as in all high-tax states (she was a New Yorker), her retirement plan distributions were subject to estate and income taxes on both the federal and state levels, as well as a city income tax!
Once I revived Jessica and Tom, I had to give them even more bad news.
As the estate tax exemption was only $675,000 (today it's $1 million) and their mother's estate was worth $1.2 million, they would have to pay a combined federal and New York State estate tax of $207,000, or almost 40 percent, on the $525,000 balance ($1.2 million - $675,000 = $525,000) of the inheritance. Neither Jessica nor Tom was in a position to shell out such a hefty amount, so Ann's retirement account itself would have to be tapped since there were few other liquid assets in the estate besides the account.
But it got worse.
Once the money was withdrawn from their mom's retirement account to pay the estate taxes, the withdrawal itself would be hit with federal, state, and city income taxes of another $80,000!
Then came the worst news of all.
Under the best payout option offered by their mom's 403(b) plan, they would have to empty the account within five years, even if they didn't need the cash.
Thus, there would be no lifetime stretch option, no 40-plus years of additional tax-free compounding-which, even at a modest rate of interest, might conceivably have grown the account as high as $10 million.
Instead, their mom's retirement account, which represented a lifetime of sacrifice and saving, would be reduced by a snowball effect of taxation on ta...
