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Social Security and how to recreate income, which includes
information about taxation, " she says.
According to Jim Pendergast, senior vice president of
lending company altLINE, a division of The Southern Bank
Co., in Birmingham, Alabama, participants ideally should be
made to understand the two main types of tax-advantaged
plans: tax deferred and tax exempt. They could be explained
as simply as: " 'A tax-deferred account means you pay income
taxes on the money you withdraw from an account when you
actually withdraw it, not when you put it in. This is how vehicles
such as traditional IRAs [individual retirement accounts]
and most DC [defined contribution] plans work, making them
extremely popular retirement accounts for Americans and
businesses,' " he says.
" Tax exempt is the opposite side of the coin, " Pendergast
would continue. " 'Here, any contributions you make
into the account in the first place are after-tax income. So,
you don't pay taxes when you withdraw from the account,
and any earnings or growth in that account remain tax-free
as well, versus other accounts where you must pay capital
gains taxes. Any account in which employees are invested
services at Lincoln Financial Group in Philadelphia.
" For the most part, we see plan sponsors offering educational
seminars about taxes like they do for Social Security,
providing tax information but not tax advice. The content
can be made available in print, " Moore says. " We encourage
participants to seek the advice of a tax professional. "
Savings Decisions
Before making any other savings decisions, the first thing
participants should think about is maxing out the employer
match, Moore says.
Then, to decide how to allocate savings among different
types of accounts-Roth, a health savings account (HSA),
options outside of the employer plan-participants need
to consider where their income will come from in retirement-Social
Security, an employer-sponsored defined
contribution (DC) or defined benefit (DB) plan, or other
assets-and what their tax rate is now compared with
what it could be in the future.
But correctly predicting whether one's tax rate will be
Participants need to consider
where their income will come
from in retirement and what their
tax rate is now compared with
what it could be in the future.
in company stock incurs capital gains taxes. You will pay
taxes on the difference in the value of the stock between the
time of purchase and of sale. The most common tax-exempt
account type is a Roth.' " This explains the concepts without
giving advice, he says.
Several advisers share such information in a PowerPoint,
short video on their website or in some other electronic
medium.
A further source of retirement income to discuss with
participants is Social Security. What to make clear about
this tax-deferred government benefit will depend somewhat
on the employee audience. " [Lower-paid] employees
won't pay taxes on Social Security if it's their only source
of income during retirement and if it's too low to be taxed, "
says Ben Reynolds, CEO and founder of Sure Dividend in
Houston. " If an employee has a pension also, he may have
to pay taxes on Social Security income if it totals $25,000
or more. This limit is different for those who are married. "
Plan Sponsor Council of America (PSCA) research finds
that the concept of retirement planning is growing in importance
with plan sponsors, surpassing interest in increasing
plan participation, according to Aaron Moore, senior vice
president, head of client engagement for retirement plan
higher or lower in retirement is difficult, Moore observes,
and this can be pointed out: " Generally, the
younger you are, the more your earning power
will increase over your career, so, if you're closer
to the beginning of your career, it's more likely
your tax rate in retirement will be higher. " For
those reasons, some people will " choose to allocate
between pretax and Roth as there's no
predictability, and they might want flexibility in
retirement, " he says.
Establishing a Distribution Strategy
When setting a course for how to take distributions,
participants should know to factor in
sources of income beyond their employer-sponsored plan,
Carcone says, and also which ones will be taxed-e.g., some
parts of after-tax, not-Roth accounts, stock sales that reveal
capital gains and interest earned in bank accounts, for which
the retiree will pay income tax. " Participants should look at
all income sources so they can coordinate a tax strategy. "
It can be noted that, when a person retires, being able to
withdraw from a tax-free source of money keeps him out of
a higher tax bracket, Moore says. And " it also helps savings
last because the retiree isn't giving up so much in taxes. "
When helping participants develop a distribution strategy,
it is key to remind them that managing tax liability is " a yearby-year
thing, " Moore says. " It's variable over the course of
retirement. Expenses may be greater at the beginning of
retirement, or later. How will taxes change when the retiree
starts getting Social Security or has to take RMDs [required
minimum distributions]? Retirees will have to adapt their
strategies to their unique needs, " he says.
" While advisers can provide education, participants
should be encouraged to work with qualified tax professionals, "
Carcone reiterates. It's a complex area where advisers
and sponsors could get into inadvertent trouble. They need to
make the right education available. " -Rebecca Moore
planadviser.com January-February 2021 | 29
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