Implementing Your Retirement Plan
Now that your retirement plan is complete it’s time to move on to implementation. During this step you will be interacting with the Social Security Administration, your human resources department, the custodians of your employer-sponsored retirement plans, your current investment custodian, your insurance companies, your estate planning attorney and your financial planner. Implementing your retirement plan on your own can leave you prone to errors if you don’t understand the details. For example, failing to rollover your 401k plan correctly can trigger a taxable event, causing unnecessary tax liability. To ensure you haven’t missed any steps up to this point, download your Free Retirement Checklist. Let’s go through each area of your plan and discuss the logistics of implementing your retirement plan, keeping in mind that you’ll want to work with your team as you do.
For most Americans, Social Security is the most common fixed income source in retirement. Once you have determined your Social Security strategy and the age you plan to begin drawing your benefit, it’s time to head to the nearest Social Security office or file for benefits online. Make sure that you have looked at each spouse’s benefit if you are married.
If you are eligible for a pension benefit, you should have already received a pension benefit statement from your employer outlining all of your options. The next step, if you haven’t already done so, is to follow the steps in my previous article, “Creating Your Retirement Plan“ to determine which benefit you will be electing. Then it’s time to complete your pension benefit election form. If you have elected a lump sum benefit, make sure you have the receiving custodian’s information and account number readily available. If you are taking an income stream, make sure that you are 100% confident in your decision, since it is often irrevocable.
I’ve explained how important it is to identify your annual shortfalls and determine where you draw income from. Once you’ve done so, the next step is to establish a systematic withdrawal to replace your employment income. You should determine whether you will draw your income annually, quarterly or monthly – it’s entirely up to you. Next, obtain a systematic withdrawal form from your custodian to establish your desired payout from each account and ensure there is enough cash in the account for your distributions. Also, if you are over the age of 70 ½, it is your responsibility to satisfy your required minimum distribution from your tax-deferred retirement accounts. Failure to do so results in a 50% penalty of the total RMD amount, which is just under 4% of the balance of all of your tax-deferred retirement accounts at age 70 1/2!
As we reviewed in “Creating Your Retirement Plan,” taxes are at the center of nearly all of your financial decisions and your tax situation can change substantially when entering retirement. When you are employed, you have to elect tax withholdings from your paychecks so that you are paying federal and state taxes as you earn income. During retirement there is no paycheck to withhold taxes from so you are required to pay estimated quarterly taxes on your own. Taxpayers must generally pay at least 90 percent of their taxes throughout the year from withholding, estimated tax payments or a combination of the two. If they don’t, they may owe an estimated tax penalty. Work with your tax preparer or financial planner to discuss your anticipated tax liability for the year and establish your quarterly payment schedule.
Most retirees have multiple investment accounts at different custodians, which complicates investment management. It’s better to open accounts at one custodian and consolidate all your accounts together by type. For example, you would rollover your 401ks and IRAs into one IRA Rollover account. This simplifies management and consolidates paperwork and tax reporting, making your job easier. Some common forms that you’ll need upon retirement to implement your investment strategy are:
- New Account Forms
- Individual/Joint Account
- Trust Account
- Traditional IRA
- Roth IRA
- Transfer Forms
- Rollover Forms
- Beneficiary Designation Forms
- Systematic Withdrawal Forms
- ACH Forms (links your brokerage and bank accounts)
Rolling Over Qualified Retirement Plans
When rolling over your 401k or any type of employer-sponsored plan, it is highly important that you request a direct rollover. With a direct rollover your retirement account administrator sends you a check made out to the new IRA custodian “for the benefit of you.” If the check is directly paid to you instead of the custodian, this constitutes an indirect rollover and a 20% federal withholding will apply and a 60-day window to deposit the check into an IRA begins. If you fail to deposit the check within the 60-day window, the entire distribution will become taxable to you. To put that in perspective, if you had a $1,000,000 401k, you could lose as much as half of it to federal and state taxes (if your state assesses income tax). You can see how one seemingly minor mistake with these types of transactions can derail your retirement plan.
A few other considerations need to be made when rolling over a 401k and other qualified plans. The first is to identify whether you have you have any after-tax contributions in your retirement plan. These contributions occur if you have ever contributed more than the maximum annual defined contribution limit allowed by the IRS. This means that you have money that has already been taxed in addition to your pre-tax balance. When you request your direct rollover from your administrator, you will want to request two checks: one for the pre-tax balance to be deposited in your IRA Rollover and another for the after-tax balance to be deposited in your Roth IRA. If you fail to get two separate checks and the entire amount is deposited to your IRA Rollover, you will have lost out on all of the future tax-free growth on the after-tax balance.
Lastly, if you have large amounts of company stock in your retirement plan with a low cost basis, you may want to consider the net unrealized appreciation strategy (NUA). NUA is the increase in value of employer stock while held in a qualified retirement plan. The Internal Revenue Code (IRC 402) allows employees to take a lump-sum distribution of their qualified plan, pay ordinary income tax on the cost basis, and then pay long-term capital gains on the growth. Anyone who holds large amounts of company stock in their qualified plans should evaluate an NUA strategy.
After all of your accounts are established and monies have moved into the proper accounts, it’s time to establish your asset allocation . By now, you should have determined the weighting of each asset class in your portfolio and which investment vehicles you plan to purchase. If you are purchasing funds, you must take the dollar amount of each asset class and divide it by the price of the fund you plan on investing in. The result is the number of shares that you should purchase, but make sure to include the cost of any trading commissions in your calculation. In my last article , I explained a concept called asset location, a strategy that takes advantage of this tax treatment by placing asset classes in the accounts that will optimize tax-efficient growth. While beneficial, this portfolio management strategy can prove to be tedious for the self-directed investor in regards to your retirement plan, but may be available to you through your financial advisor.
Wealth Protection Transfer
After conducting all of your insurance analyses, you can now execute your insurance action plan. Insurance is a complex arena and insurance products are constantly changing. It’s recommended that you work with an insurance professional to purchase or make changes to existing insurance policies. If you work with a financial planner for your retirement plan, it’s a good idea to keep them involved in the process. They know your financial situation best and can ensure that you purchase the most cost-effective products that fit your needs. Be wary of insurance agents and brokers that try to sell you products just to generate commissions. Insurance policies that may need changes upon retirement include:
- Life Insurance
- Long Term Care Insurance
- Disability Insurance (if a spouse is working)
- Homeowner’s insurance
- Renter’s Insurance
- Auto Insurance
- Umbrella Insurance
Finally, you will want to conduct a review of all of your accounts at all financial institutions and deeds of trust for any real estate properties. When you opened your new accounts at your custodian, hopefully you have titled your accounts and designated your beneficiaries appropriately. If you haven’t gotten around to obtaining a properly executed estate plan, it’s better late than never. While there are online services available that allow you to draft these templates on your own, I would recommend seeking the guidance of an estate planning attorney. Legal and tax law are too complex to attempt drafting your own document that will stand in a court of law. I recommend contacting a few estate planning attorneys and choosing the one that you are most comfortable with to draft your living trust, will, and powers of attorney for health and finance.
In summary, implementing your retirement plan is an important process and making mistakes can have huge consequences, such as the example of processing a rollover incorrectly. You want to make sure you are confident in your ability to properly manage your investment portfolio, while being aware of potential tax-distribution strategies from your qualified plans. If you are feeling overwhelmed or are not sure how to approach implementation of your retirement plan, download your Free Retirement Checklist. If you still feel like you might need some assistance, then reach out to a fee-only advisor to determine whether you are headed in the right direction or if you may need some professional assistance.
Danny G. Michael is the founder and CEO of Satori Wealth Management, Inc. He has 20 years of experience in retirement planning working with individuals, families, and business owners.