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What is the most sensible way of taking money out of your retirement plan so that it will last? It depends, of course, on your personal financial situation as well as your spending expectations during retirement. That's why you should consult with your Financial Advisor to chart a long-term course before you begin distributions, and then to try to stick with discipline to that plan.
Here are some potential distribution strategies to help make your assets last longer:
Retirement Plans like 401(k) or 403(b)
When you retire, you have to decide what to do with your retirement assets, including whether to leave the money in the plan, or roll it over to an IRA. Here are your basic choices:
Variable annuities are sold by prospectus. Please consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
Distributions if earnings are subject to ordinary income tax. In addition, a federal 10% penalty may apply to distributions taken prior to age 59 ½ and surrender charges generally apply.
Using a retirement plan already provides tax deferral. Therefore an annuity should only be used to fund a qualified retirement plan when an investor is interested in the other benefits an annuity has to offer, such as the lifetime income option and the death benefit protection. In order to provide these features there are mortality and risk/administrative expenses with annuities that are not associated with other investments. Guarantees are based on the claims paying ability of the issuer.
Stock options
Stock options are becoming a more and more common way of helping fund retirement. In most corporate stock option plans, you have the right to buy the stock at a pre-set price that is (presumably) lower than the current price. In a so-called "cashless transaction," you simultaneously buy the stock at the lower price and sell at the higher price. This can be a windfall for many people, but there are a number of pitfalls: you typically receive a large sum of cash you must suddenly turn around and invest, there are complicated tax implications for even the simplest stock option transaction, and, of course, so much depends on the performance of one stock. That's why it's vital to consult your tax advisor, as well as your Financial Advisor before making any decisions about cashing out your company stock options.
IRA Wealth Preservation Strategy
For higher-income investors, IRA assets may be subject to estate taxes at the death of either the owner or surviving spouse. You should consult with your tax advisor to help mitigate tax liabilities. Some strategies may include:
Income in Respect of a Decedent (IRD)
At Wachovia it is apparent that many Investors have accumulated significant wealth during their lifetimes. Over the years, many individuals will become the beneficiaries of estates that will be subject to the federal estate tax burden. One often overlooked concept for these beneficiaries to be aware of is IRD — an IRS term that stands for Income in Respect of a Decedent — that describes inherited income that is subject to federal tax.
An IRA or employer sponsored retirement plan (401(k), 403(b), etc) that is inherited offers a very common example of this tax situation. The income in the plan was earned by the decedent during his or her lifetime, but the tax was not yet paid on the funds remaining in the account at death. The beneficiary must pay the income tax as distributions are taken from the inherited account. So while the taxes are due upon such distributions the IRD deduction may create a sizable reduction in this tax obligation. The IRD deduction is a way for beneficiaries to offset the effect of the double taxation that comes with inherited assets like a tax-deferred retirement account that is subject to federal income tax.
The list of assets/income that qualifies for IRD is extensive and should be discussed with your tax advisor. While Wachovia Securities and its Financial Advisors do not render tax or legal advice, we do hope to educate our clients and prospects on issues that can be important considerations for them and their families.
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•Annuities
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