A Financial Option for Overachievers

Have you ever thought about what would happen if you were to save too much money for retirement? Folks, it’s a real thing. If you’re one of those rare, disciplined savers who lives a modest life, you may find that you actually have more than you’ll ever need in retirement, maybe lots more. For some, even after creating legacy systems for their loved ones, they have extra funds without a purpose.

Obviously, this is an enviable position to find yourself in. Years of hard work and sacrifice have led you to this point, and it’s a milestone that many will never attain. But unfortunately, it comes with a downside, too, because the more you have, the more those Washington Wizards in DC ultimately wants from you. It’s as if you’re being punished for being financially successful. So this week, I’d like to take a closer look at what happens if you find yourself in this position, and what you might do about it.

You see, I found myself having this very conversation with a couple I recently met with, I’ll call them Jack and Diane. Just entering their late 60’s, they’re both still working full-time – Jack is an orthopedic surgeon and Diane is an attorney for a large electronics corporation. They have one grown son who lives nearby with his wife and 2 young daughters, and they are also active in a number of local charities that serve the homeless.

They are preparing to retire in the next 2-3 years and need help deciding how to structure the significant wealth they have amassed. They’re very fortunate to have well-paying careers, and they’ve both been very budget conscious throughout their lives. Their idea of a good time is making an Italian dinner together or hiking with their dogs, and they don’t intent to live any more lavishly than that in retirement. As they added up all of their assets, they realized that their savings were much more than they’d ever need during their lifetimes. And with a legacy plan in place for their son’s family, they now had the coveted task of deciding what to do with their assets.

Of course, the IRS has a plan for that and is quite willing to help them out. They seem to see the difference between money and wealth as a playground for additional taxation. 

For example, those who hold savings in Individual Retirement Accounts (IRAs) are required to take Required Minimum Distributions (RMDs) each year beginning at age 73—even if they don’t need or want the funds. More income means a higher tax bracket, and also trigger phaseouts, which can limit or eliminate some kinds of tax deductions, such as personal exemption and itemized deductions, and sometimes trigger high taxes on Social Security income. 

Luckily, there are some options available to help reduce some of their taxes – and even do some good. For example, we discussed what’s called a Qualified Charitable Distribution (QCD) which could provide an excellent opportunity for them to “give something back” from their lifetime of savings. A qualified charitable distribution allows individuals who are 70½ years old or older to donate up to $100,000 total, each year, to one or more charities directly from a taxable IRA instead of taking their required minimum distributions. (For married couples, each spouse can make QCDs up to the $100,000 limit for a potential total of $200,000).

This may help them avoid being pushed into higher income tax brackets and prevent phaseouts of other tax deductions, though there are some other limitations. 

You see, for Jack and Diane, this means that in about 2 years when they reach 70-1/2 (and well before RMDs are required at age 73), they could start passing on some of their wealth to the local charities they support in a meaningful way while benefiting from reduced taxation too. A win-win for all involved, if it’s done correctly. 

These donations will be able to fulfill their required minimum distribution. And because QCDs don’t increase taxable income, both higher tax rates and phaseouts can be avoided. In addition, because QCDs reduce the balance of the IRA, they may reduce required minimum distributions in future years. 

QCDs are also not counted toward the maximum amounts deductible for those who itemize their giving on their taxes, so the $100,000 can be above and beyond those limits. This means that a QCD can allow them to give a bigger charitable gift than they could if they just donated cash or other assets. 

While a QCD is just one option available to help minimize your tax liabilities, it also allows you to maximize the value and impact of your gift which is important to Jack and Diane. It can be effective component of a combination of strategies tailored for your situation.

So as always - be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. 

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