Simon Says...

Good Planning Means Thinking Ahead

It's Always Something!

by Helen Simon

Ms. Simon has been the CEO of Personal Business Management Services, LLC, an investment advisory firm in Ft. Lauderdale, FL since 1998 and has more than 25 years of experience in the financial services industry. She is a faculty member at the Wayne Huizenga School of Business at Nova Southeastern University. She occasionally shares her posts with us. Connect with her by e-mail:

Just when you stop worrying about salting money away for retirement, you have to start figuring out how you can satisfy the government’s requirement for distributing those assets without getting slaughtered.

Take for instance our client Rufus, who has worked hard all of his life and made a very respectable income where he managed to save a few million bucks for his golden years. Rufus is about to turn 70 and will soon have to start taking required minimum distributions (RMDs) from his retirement accounts the April after he turns 70 ½.

Recently Rufus got married to a lovely lady who is 15 years his junior. It’s a good match, as Rufus needs someone who can keep up with him as he bench presses at the gym and goes mountain climbing in Colorado. While Rufus is busy enjoying his new life, his advisor is concerned that Rufus may not realize that he will have to make substantial RMDs in a very short period of time…or realizes it, but thinks he has no other option.

Mandatory & Taxable

These distributions are mandatory and are taxable. Rufus’ advisor believes that he has about $2 million in deferred, qualified assets. Based on the current IRS tables, Rufus’ factor (IRS Publication 590b) is 31.1.

What this means is that if Rufus has $2 million in deferred, qualified assets, he must withdraw and pay taxes on $64,308.98 that very first year ($2,000,000/31.1). Against his advisor’s suggestion, Rufus began collecting social security about 4 years ago (Social Security & Taxation Myths). He also still enjoys substantial income from a variety of investments he has made over the years. Rufus believes that there is no way to avoid all these income taxes and has resigned himself to the fact that he is stuck shelling out big time.

We often become anchored on ideas about certain situations – as in there is just no hope or no better way – which deprives us of the opportunity to be in a better situation

Real financial planning involves looking at ways to lessen this tax burden, but one must think ahead. Rufus has a few years where he can consider converting some of his deferred funds to a Roth IRA. This would lessen the amount of his RMD. He could also consider taking advantage of a little known tool called a QLAC, which would allow him to further reduce that RMD burden.

Some clients just need to listen…

There are a number of other tools that the savvy financial advisor has up her sleeve – Rufus just needs to listen. We often become anchored on ideas about certain situations – as in there is just no hope or no better way – which deprives us of the opportunity to be in a better situation in a number of different scenarios.

These scenarios often hurt our loved ones and us. Take for instance the sad tale of actor Philip Seymour Hoffman's misguided idea that he did not want his children to become “trust fund kids” and that marriage was “just a piece of paper” ended up costing his loved ones in upwards of $10 million in estate taxes. Another example of costly celebrity estate planning that has the IRS laughing all the way to the bank are the James Gandolfini estate planning errors and British pop star Sting's outright refusal to estate plan.

Despite these lessons, it is amazing that those who are so successful in some areas can be quite anchored in misconceptions, despite the writing on the wall. Despite the unfortunate tragedy, one case of estate planning we all should study involves that of Joan Rivers. Through a perfectly executed estate plan for someone in her life situation, Joan successfully passed her assets on to her intended beneficiaries without probate. With a combination of competent professionals and open-minded cooperation from clients, estate planning does not have to end in an error-filled debacle.