Q: I’m 63 years old and approaching retirement. I would like to cut back on my hours at work and leave my job in stages. My company, though, doesn’t offer that option. Have you talked with people who retired from work gradually? How did they do it? Any suggestions?
A: You certainly aren’t alone. Most employers don’t have a “phased retirement” option for older workers, which, frankly, is shortsighted. Companies that offer such an arrangement often find that it can help with succession planning, make it easier to pass on institutional knowledge (rather than have that knowledge suddenly walk out the door), and potentially reduce costs. Retaining talent is often less expensive than hiring and training new talent.
Where to retire comfortably
Even if your company doesn’t have a phased-retirement option, managers, in many cases, seem open to considering the possibility. With that in mind, some or all of the following steps might help.
Finances: A reduced schedule invariably means a reduced paycheck. (And, possibly, reduced benefits.) So, first you have to ask: Am I financially able to handle a phased retirement?
Flexibility: Most people think about phased retirement solely in terms of fewer hours in their current job. But why limit yourself to that approach? Perhaps there’s a different job in your company that lends itself to retiring in stages. Or perhaps you can retire—but do consulting work for your firm.
Mutual benefits: This is the most important part of the equation. You must figure out, before approaching your boss, how a phased retirement would benefit you and your employer. Perhaps the company is looking for volunteers for a project with a limited lifespan—say, two or three years. Or perhaps you switch to a role where you’re helping mentor or train people.
Take it slowly: Most managers don’t like surprises, which argues against walking into your boss’s office cold and announcing: “I plan to retire in a year, and I think doing that in stages helps both of us.”
Rather, this should be a series of conversations about the future—about your manager’s goals and yours. Ideally, after a few talks, you can introduce some broad ideas about phased retirement and, eventually, how those ideas might mesh with your boss’s needs and the company’s.
Q: Our 15-year-old daughter has earned annual income from an early age. She has saved and invested virtually all that she has earned. Is it too early to suggest starting an individual retirement account or other tax-advantaged investment vehicle?
A: No, it isn’t too early at all. In fact, this question is a good reminder for parents and grandparents. One of the greatest financial gifts you can give a child or grandchild is an early start in saving and investing.
In this case, you could open a Roth IRA for your daughter. (Most financial institutions require a person to be 18 or older before opening an IRA on their own. So, in the short term this would be a custodial account.) The same rules and benefits that apply to adults with a Roth also will apply to your daughter: She must have earned income; contributions are limited to the lesser of her earnings for the year or $6,000 (the current contribution cap for account holders younger than 50); and withdrawals, for the most part, will be tax-free.
Equally important: The contribution for the Roth can come from you, the parent (or anyone else), as long as the amount doesn’t exceed the child’s earnings. Let’s say your daughter earns $3,000 this year. She could save that money in a traditional taxable account—and you could contribute, out of your wallet, up to $3,000 to her Roth.
There are some bumps in this road. For instance, if the Roth account is small (and it may well be, at first), investment opportunities could be limited. But such drawbacks pale beside the advantages. In particular, the magic of compound interest means an account opened in a person’s teens, coupled with steady contributions and prudent investments, could all but guarantee a secure financial future.
Q: Past the age of 70, charitable contributions up to $100,000 from an IRA directly to a charitable institution can be applied against an account holder’s required minimum distribution. Unless I’m mistaken, this feature applies only to IRAs. Why doesn’t it also apply to 401(k)s and 403(b)s, since they, too, are retirement accounts and have required withdrawals? Is this just one of those inconsistent governmental rules? Will this inconsistency be addressed?
A: The topic here is qualified charitable distributions, or QCDs.
In short, a QCD is a tax break. If a person (age 70½ or older) transfers funds directly from an IRA to a qualified charity, that donation can count toward satisfying the person’s required withdrawal for the year. You’re correct on two counts: Such transfers can be made only from an IRA—and that rule/restriction, on its face, seems silly. Then again…it might not be.
“I think excluding QCDs from company retirement plans, including 401(k)s and 403(b)s, was done intentionally,” says Ed Slott, an IRA expert in Rockville Centre, N.Y. “I suspect Congress wanted to eliminate the cost and complexities of offering this in a company-plan setting.”
In other words, QCDs involve work. If such donations were allowed through a 401(k), for instance, the plan administrator, as well as the employer that offers the plan, could find themselves having to transfer funds for dozens (perhaps hundreds) of employees or former employees throughout the year, as well as checking whether the charities involved are “qualified.”
“This would be just another burden for company-plan administrators,” Mr. Slott says. “I don’t see Congress changing this.”
That said, you can roll over your 401(k) or 403(b) to an IRA. But be careful: If you are currently taking required distributions from a company retirement plan, you must first take your required minimum withdrawal for the year before doing the rollover, Mr. Slott notes. (An RMD can’t be rolled over to an IRA. And that withdrawal, of course, is taxable.) The balance in your retirement plan, after taking the RMD, can then be rolled over to an IRA, and a QCD can be done from the IRA for that year or future years. (Taking the QCD from the IRA for that year won’t exclude the RMD you took from the 401(k) or 403(b) from income on your tax return.)
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