Wealth Management Group Newsletter – Winter 2021
Maureen Callahan, Colin O’Neill

Is Phased Retirement for You?


Many people approaching retirement age are justifiably concerned about how long their savings will last. One strategy that can help extend the life of your savings, while easing some of the emotional strain associated with leaving the workforce, is phased retirement. This is a gradual shift from full-time work to part-time or freelance work — and ultimately to full retirement.

Phased retirement allows you to enjoy additional leisure time while gaining significant financial benefits. But it is important to plan carefully to make the most of those benefits and avoid potential pitfalls, such as losing health insurance coverage or retirement plan matching funds.

Financial advantages

Working longer via phased retirement may offer the following financial benefits:

Continued Retirement Plan Contributions
Delaying retirement allows you to continue building tax-deferred savings in IRAs and employer-sponsored retirement plans, such as 401(k)s, provided you continue to be eligible. The SECURE Act, passed in late 2019, eliminated the age limit for contributions to traditional IRAs (for 2020 and later). So, if you have earned income from a job or from self-employment and otherwise qualify, you can continue making pre-tax contributions to an IRA, even if you are over 70½.

Deferral of RMDs
You are generally required to begin taking required minimum distributions (RMDs) from traditional IRAs and 401(k)s by April 1 of the year following the year you turn 72 (70½ if you reached 70½ before January 1, 2020).

Related Read: For Good Financial Health, Take Your RMDs 

However, you can defer RMDs from your current employer’s 401(k) plan and allow the funds to continue growing until you retire if:

  • You continue working past age 72;
  • Your plan permits such deferral; and
  • You do not own five percent or more of the company.

This benefit is not available for non-Roth IRAs or for a former employer’s 401(k) plan, but it may be possible to defer RMDs by rolling those funds into your current employer’s plan.

Enhanced Social Security Benefits
If the income from your job and other sources are sufficient to cover your living expenses, you might want to delay social security benefits to age 70. This allows those benefits to grow by around eight percent per year, maximizing your monthly payments once you start receiving them.

Working longer also gives you more time to pay down mortgages and other debts while preserving your retirement savings and taking advantage of employer-provided health care and other employee benefits as long as possible.

Related Read: Considerations Before You Begin Social Security Benefits

Steps to stepping down

If you are contemplating phased retirement, take a personal inventory by gathering information about your assets, liabilities and income sources (now and in the future). Are they sufficient to last through your expected retirement years? If you cut back your work hours, will you be able to cover your living expenses without tapping your retirement savings or social security? If not, one option to consider is ceasing contributions to IRAs and employer retirement plans. But if that means giving up matching contributions, do not miss a valuable opportunity to grow your retirement savings.

Also, learn about your employer’s policies. Is phased retirement even an option? Some employers have formal phased retirement programs, while others are willing to negotiate these arrangements on a case-by-case basis.

Despite the benefits to the employer — including retention of experienced workers, mentoring of younger employees and preservation of institutional knowledge — phased retirement has not received wide attention. If your employer does not offer phased retirement (and you can live without the benefits), you might explore other options, such as a part-time job with another employer or freelance or contract work.

Finally, assess the impact of going part-time. How might reducing your hours affect your eligibility for retirement plans and other benefits? For example, it may reduce pension benefits that are based on your most recent earnings. Many employers limit certain benefits — such as health insurance, 401(k) plans and matching employer contributions — to employees who work a minimum number of hours. Of course, losing health coverage is less of an issue if you are eligible for Medicare or if you are covered under your spouse’s plan.

Going through a phase

Phased retirement can help your retirement dollars go further by increasing the size of your nest egg and delaying the time you need to start using it. ORBA’s financial advisors can help you assess your unique situation, determine the financial impact of reducing work hours and help you position yourself for a comfortable retirement.

For more information, contact Maureen Callahan at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Strike While Interest Rates are Low


Low-interest rates create attractive opportunities to transfer wealth to younger generations in a tax-advantaged way. Shifting wealth may seem less urgent now that the federal gift and estate tax exemption and the generation-skipping transfer (GST) tax exemption amounts are both $11.58 million in 2020 ($23.16 million, effectively, for married couples). But these exemptions are scheduled to revert to previously lower levels in 2026 — or earlier if the Biden administration or Congress attempts to reduce them sooner.

Related Read: Consider Reevaluating Your Tax Plans Based on the Outcome of the Presidential Election

The future of federal transfer taxes and the fact that there has been a shift of power in both the White House and Congress suggests that you might want to consider gifting strategies that lock in current exemption amounts. Another advantage of acting now is that certain estate planning strategies benefit from the current low-interest-rate environment. We discuss several general strategies you might consider with your professional advisors.

Grantor Retained Annuity Trusts

A properly structured grantor retained annuity trust (GRAT) can be a powerful tool for transferring wealth to your loved ones with little or no taxes while continuing to enjoy an income stream for a period of years. It is particularly effective if done when interest rates are low.

A GRAT is an irrevocable trust that pays you, as grantor, an annuity (a periodic fixed dollar amount) for a term of years and then distributes the remaining assets to your beneficiaries. When you transfer assets to a GRAT, the value of the gift to your beneficiaries is equal to the projected value of their remainder interests. Under IRS rules, that value is calculated by assuming the GRAT assets will grow at a certain rate of return — known as the “Section 7520” rate — regardless of their projected or actual growth rate. Assuming you survive the GRAT’s term, any appreciation in asset values beyond the Section 7520 rate (also known as the “hurdle” rate) is transferred to your beneficiaries free of gift and estate taxes.

The hurdle rate for a GRAT is the published Section 7520 rate for the month in which the GRAT is established. In recent months that rate has dropped to well under one percent. The lower the rate, the more likely the GRAT will outperform it and, therefore, the larger the potential tax-free gift. An additional benefit of a GRAT is that it is considered a “grantor trust” — that is, you as grantor are treated as its owner for income tax purposes. By paying the trust’s income taxes, rather than having them come out of the trust’s earnings, you essentially make additional tax-free gifts to your beneficiaries. Note that, if the grantor dies during the GRAT term, the assets will be included in the grantor’s estate for estate tax purposes.

Charitable Lead Annuity Trusts

A charitable lead annuity trust (CLAT) works like a GRAT, except that the annuity payments are made to a charity rather than to you. Like a GRAT, a CLAT transfers assets remaining at the end of the trust term to your children or other noncharitable beneficiaries, and the value of the gift is determined in much the same way. So the lower the hurdle rate, the larger the potential tax-free gift.

The income tax treatment of a CLAT depends on whether it is structured as a grantor or nongrantor trust. If it is a grantor trust, you are entitled to a charitable deduction up front based on the present value of the annuity payments. But this deduction is essentially recaptured in future years as you pay taxes on the CLAT’s income. For this reason, CLATs are typically structured as nongrantor trusts, in which the trusts themselves are taxed on their income, but also enjoy deductions for the amounts paid to charity.

Intrafamily loans

Loaning money to a family member is another possible option to transfer wealth. To avoid future conflicts or misunderstandings — not to mention negative tax consequences — make sure you document these loans.

So long as your loan is structured carefully and you charge at least the applicable federal rate (AFR) of interest, it will generally be respected by the IRS. If your borrower earns a rate of return on the borrowed funds that is higher than the AFR you charge, then the difference between those returns and the interest paid to you constitutes a tax-free gift. 

Related Read: Intrafamily Loans Offer Family Value

An ideal time

Current conditions make it an ideal time to take advantage of GRATs, CLATs and intrafamily loans, but it is important to act soon. If interest rates rebound, these strategies may become less effective.

Sidebar:  Selling a business to an intentionally defective grantor trust

Do you own a business? Selling it to a properly structured intentionally defective grantor trust (IDGT) for the benefit of the younger generation may enable you to retain control of the company while taking advantage of low-interest rates. An IDGT is an irrevocable trust structured so that contributions are treated as completed gifts for gift tax purposes even though the trust is considered a grantor trust for income tax purposes.

So long as the transaction is structured as an installment sale for fair market value, transferring your business to the trust does not trigger gift taxes. Typically, at least ten percent of the sale price is provided as “seed” money to the IDGT. If your business generates a higher rate of return than the interest payments on the installment sale, that excess constitutes a tax-free transfer to the trust.

For more information, contact Colin O’ Neill at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Forward Thinking