There's no such thing as a free lunch - Milton Friedman
We work our entire adult lives and save money in retirement plans just like we are told. We then retire and need to start drawing on these funds and sometimes we don’t exactly understand the ramifications of what we are doing. From the beginning I want to emphasize that I am not an accountant, and I do not give any tax advice. You need to speak with a licensed tax professional in order to understand your specific tax situation both in Israel and the US.
Earlier this week I had two Zooms that dealt with traditional IRA (Individual Retirement Account) distributions. While there is no requirement to wait until the end of the year to take your required minimum distribution, for some reason many people do wait until the last possible minute.
One Zoom was with a client who is now 72 and wants to start planning for this coming year when she will be required to start taking an annual distribution from that account. We discussed her entire financial situation and the different investment and savings accounts that she has.
We then reviewed how these retirement accounts work. She is planning on moving to the center of the country, somewhere in or near Tel Aviv. She’s planning on selling her current apartment in Haifa and using her IRA funds to make up the difference between the proceeds from her sale and the purchase price. Basically, we are talking about a lot of money.
The second meeting was with a retired couple in the US who were planning their upcoming Aliyah. Pretty much all of their savings were in IRA accounts. They own a home in middle America, and similarly to our first case, will need to draw on investments to make up the difference between house sale proceeds and an apartment in Jerusalem.
Both the Aliyah couple and the 72-year-old both set forth buying an apartment as their number one goal for the next 2-3 years. When we started discussing how they were planning on paying for the apartments they both said that they have more than $1.5m in a traditional IRA, and that they would take out approximately $1million and use that to fund the purchase. Independently they both noticed that I made a face and rolled my eyes when they said that. They asked me what was wrong.
The fact is that I hear this kind of thing all the time from retirees who are planning on funding or making big purchases with their retirement funds. I asked them if they understood how IRAs work and what happens when you take money out of the IRA-called a distribution. I explained that if you have an IRA worth $250,000 and it increases in value to $350,000 you will not pay US tax on the appreciation.
But when you take a distribution from the IRA it’s taxed as income. So, if you were to withdraw $1m, and it’s treated like income, you can only imagine how much in the way of taxes you would pay—hundreds of thousands of dollars potentially. For the 72-year-old we then discussed how she can use her IRA and some of her other accounts to buy the apartment but that she could do it in a much more tax-efficient manner. By mixing and matching various funds in various accounts, some taxable, she should raise the amount of money she needs without getting walloped in tax.
The couple planning on Aliyah was more complicated. Because they have virtually all of their savings in IRAs, they will need to either scale down their purchase price, or kiss goodbye to tens if not hundreds of thousands of dollars in tax.
It was inspirational speaking to the couple coming on Aliyah. After all, moving to a new country as a retiree can’t be easy. Yet even in the midst of a multi-front war, they want to come and live in Israel. It’s great that they are making Aliyah through Nefesh B’Nefesh . But just like they are planning out their Aliyah the same attention needs to be paid to their financial Aliyah. They needed to speak with someone about their finances to make sure they are doing things correctly and help them understand how things work. Financial mistakes when you are in retirement can be extra costly because not just did you lose money, but since you are no longer working, it’s hard to make up for the money lost.
Be deliberate
Slow down and be deliberate before making big financial decisions, and make sure you understand all the facts and ramifications of your decision before pulling the trigger.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill) and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.