The Wall Street Journal - 11.09.2019

R4| Wednesday, September 11, 2019 THE WALL STREET JOURNAL.

JOURNAL REPORT | WEALTH MANAGEMENT

I’m 63 years old and approaching retire-
ment. 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?

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 institu-
tional 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.
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 re-
tirement?
Flexibility:Most people think about

could be limited. But such drawbacks pale

beside the advantages. In particular, the

magic of compound interest means an ac-

count opened in a person’s teens, coupled

with steady contributions and prudent in-

vestments, could all but guarantee a secure

financial future.

iii

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 mini-

mum 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?

The topic here is qualified charitable distri-

butions. 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

could find itself having to transfer funds for

dozens (perhaps hundreds) of employees or

former employees throughout the year.

That said, you can roll over your 401(k)

or 403(b) to an IRA. But be careful: If you

are currently taking required minimum dis-

tributions from a company retirement plan,

you must first take your RMD for the year

before doing the rollover, Mr. Slott notes.

(An RMD can’t be rolled over to an IRA.

And that withdrawal is taxable.) The bal-

ance 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.)

Mr. Ruffenachis a former reporter and

editor for The Wall Street Journal.

His column examines financial issues for

those thinking about, planning and living

their retirement. Send questions and

comments [email protected]. SONIA PULIDO

Slow Exit

Offeringsofsurveyedemployerstohelp

workerstransitionintoretirement

Source: Transamerica Center for Retirement Studies

Accommodateflexibleworkschedules

39%

31%

Enableemployeestoreducehours

27%

Encourageemployeestoparticipatein

successionplanning,trainingandmentoring

24%

Enableemployeestotakeonlessstressfulor

lessdemandingjobs

17%

Provideinformationaboutencorecareers

16%

Offerretirement-orientedlifestyleand

transitionplanningresources

More snowbirds are expected to
make a permanent move as the curbs
on state and local tax deductions are
starting to be felt.
The Tax Cuts and Jobs Act of 2017
clamped a $10,000 limit on the
amount of state and local taxes—in-
cluding income and property taxes—
that joint filers can deduct from their
income for federal taxes.
Financial planners say that as high-
net-worth taxpayers finalize their
2018 returns to meet the October tax-
extension deadline, they expect many
residents of New York, New Jersey,
California and other relatively high-
tax states will decide to spend more
time in Florida, Texas, Nevada or
other states that don’t collect income
taxes, or move there outright.
“People are just starting to see the
effect,” says Daniel Bernard, an attor-
ney with Twomey Latham in River-
head, N.Y. “Over the coming months,
we’re going to see a lot more people
looking to establish Florida residency.”
An analysis conducted by Connecti-
cut projected that residents of the
state would pay an additional $2.8

billion in federal taxes on their 2018

returns because of the change in de-

duction rules. New York State Gov.

Andrew Cuomo has complained that

the deduction limit and other tax

changes are prompting residents to

flee to Florida.

Ed Wollman, a founding partner

who handles taxes and estates with

Wollman, Gehrke & Associates in Na-

ples, Fla., says a New York City snow-

bird couple with taxable income of

$500,000 would pay about $50,000

in state and city income taxes. A cou-

ple with the same taxable income in

Illinois would escape a tax bill of

close to $25,000 by moving to a no-

income-tax state, he says. In New

Jersey, the savings would be nearly

$32,000, in California more than

$46,000 and in Connecticut more

than $32,000.

Nevada has seen an influx of Cali-

fornia residents fleeing the state’s in-

come tax for years, but the new limit

on the federal deduction has pushed

even more Californians to look at Ne-

vada or other no-tax states, says

Christopher Manes, a tax planner

with Manes Law in Palm Springs, Ca-

lif. “Most of my clients are high-in-

come individuals, so changing their

residency from California has obvi-

ous benefits,” Mr. Manes says. “But

for people in the $500,000 bracket,

the state and local tax issues can be

the straw that broke the camel’s

back.”

In Texas, estate attorney Virginia

Hammerle of the Hammerle Finley

Law Firm in Lewisville reports an in-

flux of snowbird clients wanting to

move their tax residences from Cali-

fornia and the East Coast. “This has

become a very hot topic,” Ms. Ham-

merle says. “I’ve had clients who tell

me they realize savings of $50,000 to

$100,000 annually.”

Leaving state income taxes behind

can be more complicated than it

might seem. States all have their own

rules about what makes someone a

resident subject to their taxes. For

example, if you run a business in

New York, or your minor children go

to school there, the state can rule

that you’re a New York resident for

tax purposes, even if you live most of

the time in another state. In some

cases, the question of tax residency

can come down to seemingly minor

issues like where you keep your pet

or your wedding pictures—indicators

of which house is truly your home.

States with income taxes don’t

want to lose that revenue, and will

investigate to make sure people who

have stopped paying state income tax

have done so legitimately.

“New York is very aggressive with

residency audits. They can collect

about $200 million a year this way,

so it can be quite lucrative for them,”

Mr. Bernard says. “Snowbirds can get

into trouble because they might go to

Florida for eight months but still be

considered domiciled in New York.”

Catherine Frank, executive direc-

tor of the North Carolina Center for

Creative Retirement, suggests one

solution for people who own homes

in two states: Move full time to the

lower-tax state. It’s simpler than fig-

uring out how to split time between

two homes without running afoul of

the higher-tax state’s rules, and it

cuts down on living expenses.

“It’s always interesting to me that

people do all that to save on taxes,

and then they maintain two homes,”

Ms. Frank says. “That’s a pretty ex-

pensive way to live.”

Mr. O’Connor is a writer in metro-

politan Detroit. He can be reached

at [email protected].

BYBRIANJ.O’CONNOR

THENEWMATHFORPEOPLELIVINGINHIGH-TAXSTATES

41

States that collect tax on

wages and salary

13.3%

California’s top marginal income-

tax rate, the highest in the country

Income-Tax-Free States

• Alaska


• Florida


• Nevada


• New Hampshire *****


• South Dakota


• Tennessee *****


• Texas


• Washington


• Wyoming
  ***** Has tax on dividends and
  investment income
  Source: The Tax Foundation

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 it-

self to retiring in stages. Or perhaps you can

retire—but do consulting work for your firm.

Mutual benefits:This is the most impor-

tant 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 conver-

sations about the future—about your man-

ager’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.

iii

Our 15-year-old daughter has earned an-

nual income from an early age. She has

saved and invested virtually all that she

has earned. Is it too early to suggest start-

ing an individual retirement account or

other tax-advantaged investment vehicle?

No, it isn’t too early at all. In fact, this ques-

tion 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 institu-

tions require a person to be 18 or older be-

fore opening an IRA on their own. So, in the

short term this would be a custodial ac-

count.) She must have earned income; con-

tributions are limited to the lesser of her

earnings for the year or $6,000 (the current

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 ac-

count—and you could contribute up to

$3,000 to her Roth.

If the Roth account is small (and it may

well be, at first), investment opportunities

It Isn’t Easy to Retire Gradually.

But It’s Smart to Try It Anyway

Also: Answering readers’

questions on when to start an

IRA and charitable giving

ASK ENCORE|GLENN RUFFENACH

Before approaching

your boss, figure out how

a phased retirement

would benefit you and

your employer.