Pension Cash Problem

by | Jan 21, 2017 | Archives

A recent Wall Street Journal article “Pulling Retirement Cash, but Not by Choice” highlights a pension problem I have this year.   This challenge will impact a growing number of us in the years ahead.  The difficulty is we have to take taxable income we don’t want or need.

Mandatory minimum distributions from Merri’s and my 401(k) start in full force this year.

The Wall Street Journal article reviews how mandatory withdrawals like this in 401 (k)s, IRAs and other tax-deferred retirement accounts are starting to affect many others and how this force creates such a massive shift of cash, it could impact the stock market.

pensions wsj.com

Image from “Pulling Retirement Cash, but Not by Choice” (1)

Let’s face it.  Too much income is a good problem but still a problem.

The article says:  The largest generation in U.S. history has to start pulling its retirement money this year, kicking off a mandatory movement of cash that could total hundreds of billions in the coming decades.

U.S. law requires anyone age 70 ½ or older to begin annual withdrawals from their tax-sheltered retirement accounts and pay taxes on those distributions.  The oldest of the nation’s 75 million baby boomers cross that threshold for the first time this month, according to a U.S. Census Bureau estimate of when that demographic group began.

Skipping the distribution can be really expensive as there is a 50% penalty on funds that should have been but were not withdrawn.

The obligatory outflows from 401(k)s and IRAs are expected to ripple through the U.S. economy, the stock market and a money-management industry that relies heavily on fees from boomers’ tax-sheltered savings plans and assets.

Another Wall Street Journal article “What to do if you are 70 1/2?” (2) gives some suggestions such as taking distributions in kind instead of cash such as stocks, bonds or even as a piece of real estate.  For IRA owners who don’t plan to spend the money, in-kind withdrawals can help avoid commissions on selling and then rebuying investments.

The article also explains that IRA charitable transfers can be tax-efficient for those who wish to make a donation.  IRA owners can donate up to $100,000 of IRA assets a year to qualified charities and count the gifts toward their required distribution.

However, that article misses the biggest way to gain tax deductions: Have your own business!  A micro business can create substantial tax benefits, even if started after the age of 70.   The earlier one starts, the better, but there are income, lifestyle and tax benefits at any age.

A small, enjoyable, purposeful micro business creates many tax deductions including home office, office supplies and furniture. Computers, copiers, fax machines and scanners can be tax-deductible.   Software and subscriptions can be written off.   Utilities and telephones charges can be set off against income.

Insurance premiums can become tax deductible and even when one passes age 70, retirement contributions can still provide some tax savings.  The idea of contributing to a pension at age 70 and beyond makes sense if one currently has sufficient income.  Contributions reduce taxes now and make help assure adequate pension in come later.

Pension contributions become more difficult at age  70 1/2, but there are still benefits.  Traditional IRA contributions are no longer possible but there is no age restriction placed on the 70+ crowd for contributions to a 401(k).  A 70s plus self-employed worker can contribute more to a 401 (k) than the minimum taxable distribution so the net result for the individual is still a deduction.

There are partial deductions that can be taken on meals, entertainment and gifts.   Travel offers some special benefits especially if the business is tailored to lifestyle.  For example, Merri and I travel from the US East Coast to the West Coast as my mom, a daughter and grandchildren children  are there.  Our webmaster is also on the West Coast so on our business trips we also stop to see the family while we conduct business.  This allows a partial write off on the flight, hotel and car rental.

Take reasonable steps to get business suppliers or customers in places where you want to travel.  Then you can integrate business and lifestyle pleasures.   You can even take your business travel by cruise ship and deduct up to $680 a day.

IRS Regulation 1.274-4 gives one-owner business a friendly rule because transportation costs to a foreign destination for seven days or less, excluding the day of departure, is not subject to an allocation between business and personal days.  If you fly to a US destination and board a cruise ship that takes less than a week to arrive at your deductions can include the cost of:  Round trip travel to the US port of embarkation, cruise ship fare up to $680 per day,  food and lodging in destination, air fare back to US port and air fare from travel to home.

Another great write off can come from using two cars in business.   IRS Form 4562, which is filed by proprietorships and corporations, allows write offs on more than one vehicle.  In specific instances by switching vehicles with your spouse every week you can deduct up to  73.7% business use of two cars.  A couple using average cost cars driving average miles can gain an extra deduction of around $13,000.

Child labor is a favorite of mine.   We can employ our kids or grand kids.  Depending upon how we pay them, they may be able to avoid income taxes.   Plus, there is no Social Security tax when we hire children who are 17 or younger yet we can deduct the salary as a business expense.

Thoughtful child labor may be one of the most powerful inheritances  we can give our heirs.  Merri and I employed our children when they were at home and feel that the experience of the work and responsibility helped them become far more successful in their lives.  We are working on bringing our 14 year old grandson to the farm this summer, so he can mow, trim, dig in the dirt and help raise trout and harvest deadwood to make tables for sale.  This healthy work will get him away from computers and cell phones, leave him with the pride of hard-earned cash and gives us a way to transfer money to him in a tax deductible way.

All of these tax ideas are general and can change almost every year.   Tax planning must be specific to your situation as your income and wealth position is unique.  Be sure to employ a tax professional to assist you creating your own strategy.  You can learn more about this type of tax deduction and get a link to our tax preparer at “Tax Deductible Cruises and Tax Savings Secrets” (3).

Most important of all, a micro business can help us continue serving our purpose.  This is the cornerstone of being a Pruppie.   Pruppies take advantage of every new technology they can.  Pruppies enjoy earning in this advanced technological world.  They also engage in activity they love that serves a purpose in society in a way that will sustain them in case the intricate structure of our technology and global economy should fail.

Pruppies are prepared in case everywhere, or at least everything relating to their income and savings, fails and the fabric that surrounds their lives disintegrates into an unknown veil.  A Pruppie’s efforts are not a sacrifice, but a joy that creates service and income at any age and provides tax benefits even past the age of 70.

Gary

(1) www.wsj.com:  Pulling retirement cash but not by choice

(2) www.wsj.com: What to do if you are 70 1/2

(3) www.garyascott.com/2015/08/08/42735.html

[showad file=”https://www.garyascott.com/ads/lw”]