Jim and Amanda's Story

Jim and Amanda came to us right when Jim was entering retirement. Amanda was already retired and collecting a state pension. Jim had a varied and successful working life and was collecting pensions from three sources in addition to establishing a sizable nest egg from his project management and engineering career. Jim and Amanda were most concerned about efficient retirement cash flow and management of taxes considering that over 80% of their nest egg was held in traditional retirement accounts that are taxed as ordinary income when withdrawn. Additionally, Jim and Amanda wanted to leave a legacy for their children and wanted the plan to include the cost to relocate in retirement.

In diving into their plan, it became readily apparent that a “tax torpedo” was headed toward Jim and Amanda. The tax torpedo occurs when IRS required retirement account distributions increase over time and push the taxpayer into higher and higher tax brackets. In addition to higher tax rates, the higher income also results in higher taxes imposed on Social Security benefits and higher costs for Medicare. These taxes and additional fees can take a significant bite out of retirement wealth. We assist Jim and Amanda develop a plan of aggressive Roth conversions to move some of the funds out of the traditional retirement plans by paying taxes now to minimize future tax rates. Additionally, and just as important, we developed a tax-efficient asset allocation plan with Jim and Amanda to manage growth and future cash flow from the various accounts, and to add to the legacy to be passed to their surviving family. We also assisted with development of a distribution strategy that can weather market fluctuations and maintain tax efficiency, which is another critical aspect of retirement planning. The financial plan that we developed for Jim and Amanda was projected, over their lifetimes, to more than double their wealth when compared to the path they were currently on.

Another challenge with Jim’s plan involved a retirement plan that held employer stock that had appreciated over time. This kind of stock can receive special tax treatment if proper procedures are followed. On the other hand, sometimes (as was found to be the case with some of Jim’s employer stock) the special tax treatment is not worth payment of current taxes that are required to achieve the tax break. Therefore, we developed a plan with Jim for distribution of the company stock through a couple of different methods. When Jim went to self-implement the plan with his broker, the broker did not follow the plan. We subsequently had to get together with Jim, his broker and accountant to fix the error. Come tax time, we assisted with determining the amount and proper classification of gains associated with the transactions. We also identified that IRS instructions allow for gains on the employer stock to avoid the additional 3.8% tax imposed on investment income.

With a solid retirement plan in place, Jim and Amanda are able to focus on enjoying their retirement so they are able to enjoy their prosperous and happy lives.

Note: Case studies are fictitious and are not the experience of actual clients.  Studies are presented as an example of services that can be expected when working with Personal Prosperity.