With the end of 2016 just a few months away, many corporate executives and managers in metro Atlanta are setting their sights on retirement. But to maximize income and minimize taxes in retirement, they need a financial plan that turns their complex assortment of compensation plans into a well-oiled cash flow machine.
For many executives, their final year of work will translate into the highest annual compensation of their career due to stock awards, deferred compensation and other lump sum payments.
Over the past several years, I’ve helped numerous executives retire from their companies. Here are five recommendations to get the maximum benefit from their compensation plans as they make the transition into retirement:
Consider delaying retirement until March 31, 2017. Waiting a few months can provide significant financial gains. First, it can enable a person to make the maximum contribution to their 401(k) plan for 2017. Next, executives who participate in a deferred compensation plan may be able to defer the rest their 2017 income on a pre-tax basis. This helps lower taxes if they have a bonus or stock plan with a forced payout in the year they retire. If an executive has restricted stock or stock option grants that vest the first quarter of each year, waiting until the end of that quarter to retire could mean keeping more of their stock grants upon retirement.
Contribute to a Health Savings Account (HSA). By making the maximum pre-tax contributions to this account each year, an executive can help cover medical expenses not only for this year, but for future years since the balance in the account can be carried over each year. Most HSAs offer investment options too, allowing balances to grow over time. Plus a client who retires a few months after year-end might qualify for one more company contribution into their health savings account. (Contributions to an HSA are only allowed for those enrolled in a qualifying high deductible medical plan.)
Pension – lump sum payout or monthly distribution for life? This could be the most important financial decision an executive ever makes, and should be thought about well in advance of retirement. The decision differs for everyone, but here are some common reasons to go with one over the other. By taking a lump sum payout, a person can invest the funds and have a chance for that money to grow over their lifetime, take a withdrawal for a large purchase, such as a new car, or leave the money to their spouse and children when they die. And, if the person is in poor health, they will get their maximum benefit right away.
On the other hand, monthly payments for life provide a stable income and peace of mind, help diversify a retiree’s sources of income and mean less reliance on income from their investment portfolio. And if they live long enough, the monthly amount could exceed the value of the lump sum payment.
Allow your deferred compensation plans, 401(k) plans and Social Security to work together. Most corporate executives' wealth is tied up in stock options and other company compensation programs which will provide major sources of income during retirement.
By developing a strategy to live off stock options and deferred compensation income before the age of 70, a retiree can wait until age 70 ½ to start drawing down on their 401(k), the age the government requires you to start taking money out. Plus, by waiting until age 70 to file for Social Security, they will receive the maximum benefit.
For Charitable Contributions, Set up a Donor Advised Fund. Many retired executives and managers want to use their wealth to help others. A donor advised fund can enable a person to pre-fund several years of charitable gifts while receiving a tax deduction for the entire gift in the first year. For example, if a person decides to contribute $100,000 to a donor advised fund and give away to charity $10,000 annually over 10 years, they will receive a tax deduction for the $100,000 in the first year. This deduction can allow them to help offset the taxes they will owe on big stock or bonus plans they are likely to receive in their final year of employment.
Lisa Brown is a partner and wealth advisor at Brightworth, an Atlanta wealth management firm with $1.3 billion in assets under management.
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