By Bernard H. Greenberg
ECENT CHANGES in our pension and IRA laws have captured the attention of many planners. There have been several articles that suggest that you should use the three year waiver on excise taxes that commences in 1997 to start drawing down your IRA or pension. Is this a correct strategy? If you don't have the right information, then making an uninformed move with your IRA or pension could be extremely hazardous to your wealth.
Our pensions and IRA's are subject to rules about when and how much we can withdraw from them. Generally, withdrawals are subject to ordinary income tax and must commence when we reach a certain age. Excess withdrawals have been subject to a 15% excise tax over the ordinary income tax. As a tax-raising measure, President Clinton recently signed a bill that waives the 15% excise tax for three years beginning January 1997. This is designed to encourage people to take excess withdrawals from IRA's and pensions during the three year period. But is it a good idea to take advantage of the three year waiver of the 15% excise tax? The answer may not be as clear as you think.
"PENSION FIRST vs. PENSION LAST"
IT SEEMS THAT taking money out not subject to the tax reduces the overall tax that your IRA or pension would be subject to. However, the benefit or detriment of taking money out of your IRA is more involved then just the excise tax savings. Because of the tax deferred nature of growth in your IRA and pension and your ability to invest in assets that grow, you should consider performing a "pension first vs. pension last" calculation. This means that projections can show you the effect of spending your pension first in retirement, or spending it last. You may be surprised at the results of these calculations.
Performing these calculations allows you to see the actual dollar results of spending your pension or IRA first, last or some other combination in retirement. This analysis also allows you to calculate whether you will have sufficient funds for your retirement purposes, for gifting to family members and even enough to buy life insurance in the future. Without these projections, you can only guess on how long your pension or IRA will last and which option for your retirement funds you should select. Guessing with your retirement funds is generally not wise.
IRA WAIVER RAISES ORDINARY INCOME TAX
THESE CALCULATIONS have become even more important now with the three year waiver of the excise tax on withdrawals for your IRA which goes into effect in 1997. The three year waiver of the 15% excise tax is designed to encourage people to withdraw money faster from their IRA's and pensions. If you do make withdrawals from your IRA or pension, you will owe ordinary income tax on the amount withdrawn. This is why this proposal was signed by the President, to increase current tax revenues, by causing people to draw down their retirement accounts faster. However, whether you should take excess withdrawals from your IRA or pension plan is solely a function of the results of the "pension first vs. pension last" analysis that I refer to here.
Improperly planning withdrawals and the order of settlement of your pension or IRA can trap you when you are least able to respond -- during your retirement years. Since everyone's situation is different, proper planning for your IRA or pension does involve getting the right information and analysis. In addition to accumulating and reading good information, a good place to start is to obtain a "pension first vs. pension last" analysis to review and discuss with your financial advisor.
Web Law Review, Summer 1997
Text and Photo ©
1997, Bernard H. Greenberg
Web Package © 1997, EagleLink