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Post-SECURE - Monies to next gen - Pension with Contingent Annuitant

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  • Post-SECURE - Monies to next gen - Pension with Contingent Annuitant

    1st world problem - how to get anticipated wealth to next generation with loss of Stretch IRA?
    We lost a very efficient and nice wealth transfer mechanism this year and looking for ways to do it efficiently. Revisiting an option for pensioners: the contingent annuitant.

    Most pensions are calculated as single life annuity.
    Often can add spouse/DP with survivor benefits between 25%-50% with minimal impact: eg FERS: 5%-10% reduction for this
    I ran across a Boglehead thread mentioning using children instead of spouse and looked into it.

    For Univ California it appears a decent option:
    Using Son who is 30 years younger -- for full survivor benefit is a 23% reduction-- if choose 50% survivor it is a 13% reduction.
    --our other two pensions at aren't as generous on the contingent survivor unfortunately : Kaiser - 26% reduction for only 2/3 survivor

    monthly new monthly survivor reduction
    $9499.24 7299.99 7299.99 23%
    So the question is: should we consider taking a reduced pension with paid survivor benefits to kid and use the tax deferred IRA to make up any potential deficits in our lifetime? It'll drain the IRA faster, but also decreases RMD concerns as well as a lifetime dollar transfer instead of 10 years.

    Emotionally it works for us. How about financially? Worth the swapping of pension reduction with IRA funds?
    Last edited by StarTrekDoc; 08-16-2020, 08:51 AM.

  • #2
    I know nothing about this topic so I thought I would bump it. Maybe spiritrider or Johanna knows about this. I would triple check that the reduced pension benefit will be "enough" for you and your wife. Is your son your only child? Sounds good in reducing the RMDs.

    Comment


    • #3
      Originally posted by StarTrekDoc View Post
      1st world problem - how to get anticipated wealth to next generation with loss of Stretch IRA?
      We lost a very efficient and nice wealth transfer mechanism this year and looking for ways to do it efficiently. Revisiting an option for pensioners: the contingent annuitant.

      Most pensions are calculated as single life annuity.
      Often can add spouse/DP with survivor benefits between 25%-50% with minimal impact: eg FERS: 5%-10% reduction for this
      I ran across a Boglehead thread mentioning using children instead of spouse and looked into it.

      For Univ California it appears a decent option:
      Using Son who is 30 years younger -- for full survivor benefit is a 23% reduction-- if choose 50% survivor it is a 13% reduction.
      --our other two pensions at aren't as generous on the contingent survivor unfortunately : Kaiser - 26% reduction for only 2/3 survivor

      monthly new monthly survivor reduction
      $9499.24 7299.99 7299.99 23%
      So the question is: should we consider taking a reduced pension with paid survivor benefits to kid and use the tax deferred IRA to make up any potential deficits in our lifetime? It'll drain the IRA faster, but also decreases RMD concerns as well as a lifetime dollar transfer instead of 10 years.

      Emotionally it works for us. How about financially? Worth the swapping of pension reduction with IRA funds?
      youd have to run that against taking the higher payout, placing it in taxable, still spending from the IRA, then a step up basis on death....

      Comment


      • #4
        Originally posted by Peds View Post

        youd have to run that against taking the higher payout, placing it in taxable, still spending from the IRA, then a step up basis on death....
        Yep - The higher payout to myself would mean lower IRA drafting; but running into RMD issue so this electing to give to child helps 'drain' the IRA a little ahead to so RMDs won't be so impacted.

        So no one doing pensions here these days?

        Comment


        • #5
          Originally posted by StarTrekDoc View Post

          Yep - The higher payout to myself would mean lower IRA drafting; but running into RMD issue so this electing to give to child helps 'drain' the IRA a little ahead to so RMDs won't be so impacted.

          So no one doing pensions here these days?
          No opinion but:
          *SECURE seemed to have a goal of raising taxes by elimination the stretch and allowing annuities to be marketed in retirement plans.
          *Annuities (with survivorship) seem to be a pension plan. Typically not a good idea.
          *I don't typically think strategies based on tax turn out well. (tax tail wagging the dog).
          *The investment growth can easily out strip the pension investment.
          *I could work, but it is tough to outsmart the insurance companies.
          That's a lot life expectancy to overcome to sink funds into a pension for tax benefits.

          Comment


          • #6
            I understand why you are asking, but two questions come to mind in the scenario. First, are you and your spouse really ok with the other not being the designated beneficiary? Second, if RMDs are looking like they will be a problem, have you considered Roth conversions after you retire? I personally wouldn’t do it, but in my case I think I would worry about loss of control of the assets. Just me.

            Comment


            • #7
              Larry Ragman Great questions. California requires signed spousal consent. It's a $26,400 per year decrease - say 30 years (death at 90). = $792,000 straight cost that we'd potentially draw from tax-deferred account. We anticipate sufficient additional funds in that bucket do this. And the potential payoff to child inheritance is probably 30 years = $2,600,000 stretched over with those assumptions of longevity.

              Tim Same great concerns. Exactly. We have 3 pension plans setup by employers. That's set and we have no control on that beyond single annuity We probably wouldn't do this via regular tax-deferred because of the overhead costs inherent in it. The pensions costs are already baked in, so the reduction is our question. Does that 792k get outweighed by 2.6M in the next generation---understanding the longevity uncertainty along with %return uncertainty.

              Comment


              • #8
                But how does this help your RMD issue? You are going to pay income tax on the withdrawals regardless. Are you anticipating more, but lower withdrawals to hold down the tax bracket? If not, you are really just discussing the trade between using the tax deferred withdrawals for spending or investing in taxable.

                Similarly, I was trying to figure out the tax advantage between generations. Your plan would push income tax on some of the pension to the next generation, but not really improve your own tax brackets. That is, won’t you be taking enough from both pensions and tax deferred to already be in one of the highest brackets? Again, just my bias, but I’d probably follow Peds’ alternative. You and spouse take all the money, put what you don’t need in taxable, and kid inherits with stepped up basis.

                One last thought that reinforces my point. While I can’t show you the math, the 729k v 2.6 M issue, or whatever the right numbers are, is likely to be actuarially equivalent.
                Last edited by Larry Ragman; 08-17-2020, 09:59 PM.

                Comment


                • #9
                  I don't know that the $$ shift is actuarially equivalent -- that's one of my questions. I ask because Kaiser too offers child designation and has a significantly worse % reduction by 10%+.

                  For the RMDs, we're anticipating hitting RMDs at a significant rate because we're fortunate to have 3 pensions and passive income from real estate doesn't require much pretax draws--hence forcing a sizable RMD that's not needed. Currently we have $1.6M in tax-deferred accounts and taking a 4% return puts RMD starting at $138k--which is much more than we need; forcing paying taxes that don't need. Tax wise - RMD taxed no matter what, but the $26,400 less per year of pension income is deferred to next generation in taxes during RMD years -- so more tax efficiency in that respect yes.

                  Then there's the recovery of the stretch concept over said 30 years (instead of 10 with SECURE) -- even if actuary neutral.

                  Mental math. Still don't know if it's worth it and need a person who knows numbers to see if mathwise an advantage and tax efficient. There's a nice psych behind it too that we'd be providing a 2nd generation pension with my pension.

                  Could do the primary mantra of retirement too -- KIS. Burn it now, die broke. If anything left over, next gen is fortunate

                  Comment


                  • #10
                    Your federal pension only has survivor benefit for your spouse. That one’s pretty straightforward (get the full survivor benefit).

                    The California dependent survivor benefit Is a more interesting animal. While there is some tax arbitrage opportunity, you’re adding decades more time for California to renege on its pension obligations. Cash inherited from your taxable brokerage account is less likely to be expropriated than a pension payment is to be reduced, inflation adjustment reduced or eliminated, or additional taxes applied.

                    Plus your kids could choose to live in Las Vegas, Tampa, Austin, or Vancouver, WA for six months and a day and pay no state income tax. A California pension could put your kids under the boot of the Franchise Tax Board for life.

                    It still is possible that the dependent survivor benefit for the UC pension (along with Roth conversions to the extent you don’t go to a ridiculous tax bracket) is the right answer. But there are some state-specific bad things that could happen in the next half century or more.

                    Comment


                    • #11
                      Reminds me of “expert witnesses”. Each side has a desired result and hires a professional to produce the desired results. It all depends on the assumptions.
                      Just as a hoot, drop a note to a financial actuary.
                      https://actuaryonfire.com
                      Hey – I would love to hear your thoughts, either through the comment box or drop me an email [email protected]

                      Comment


                      • #12
                        You could post this question on The Actuary On Fire blog to see if it is actuarially equivalent.

                        Comment


                        • #13
                          I don’t know about the tax implications but we can guess the compounding implications.

                          If you took the pension at 115k per year for 5 years, and could get all of that into your son’s retirement accounts from age 18, at age 23 he would have : at least 600k in retirement space.

                          using assumption of : 2% real CG and 2% yield, this would be = 3.1M @ age 65 (in age 23 dollars).

                          A bird in the hand is worth how many in the UC pension system ?

                          The annuity option over a time period over 40+ years has too much credit risk and inflexibility for me to consider even if the return is slightly favourable (which it may not be). The return would need to be 50% or more over the time horizon to compensate for that inflexibility and credit risk to me.

                          Not sure what the psychological effect of giving a trust/pension/retirement account from a young age does and whether this is very negative for drive.

                          I figure, if it is in retirement space at least they can’t blow it on something silly too early. Hopefully I’m still alive until they’re age 35 and I have a good 10 years or more to teach them about sensible investing in the retirement space.

                          Please tell us what you decide !

                          Comment


                          • #14
                            All great points! Absolutely the painful drawback of pensions is risk of the company health. Even though CA is the 7th largest economy in the world, I do worry financial stability of its pension -- especially every time a county goes bankrupt, one of the largest creditors is CalPERs. Each time they come up 100% whole, but will that last? Who knows. Extending that run 50+ years is a very valid concern

                            VA pension is locked to spouse and Kaiser pension really entices spouse with a significant difference for nonspouse; hence the only one we're even considering is the UC Pension. Hatton great thought. Will try them out tonight

                            Right now all the pensions remain with spouse. We won't have to decide for another 12 years probably, unless I call it quits sooner than planned.

                            The easy answer is staying pat and not much wrong with that as dollars in hand is worth more in the pension bush

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                            • #15
                              Do you need to make a firm, binding commitment to name your spouse or your offspring? Or can your spouse disclaim the pension and name your kid(s) down the road?

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