Optimizing Your Retirement Assets. For many, planning for retirement is a lifelong endeavor - maximizing contributions, perhaps growing a business, saving, investing, and can also include accumulating a variety of assets (second homes, investment property, art, collector cars, etc.). At some point, the decision is made about when to retire. The more time – as measured in years – ahead of your retirement that you engage an investment and wealth management planning professional, the more opportunities you could have to optimize the assets you have worked so hard to attain.
An Illustrative Example: 1031 Exchange with Conversion to Primary Residence. This is the story of a fictitious couple, Mary and John. In their mid-50s, Mary is an executive at a large company and John manages their household and other properties. They own their primary residence in Minnesota and have owned two rental homes in Colorado for six years. Mary and John want to retire in their early 60s, downsizing the Minnesota home for use during summers, and utilizing the equity of both Colorado rentals to purchase a primary residence in Florida.
Selling the Colorado rentals outright to fund the purchase of the Florida property would generate significant capital gains. Instead, Mary and John can do a 1031 exchange of both Colorado properties to purchase a Florida property of equal or greater value. The transaction requires that they initially rent out the Florida property for at least two years and hold the property for a minimum of five years. After two years of rental, they can sell/downsize their Minnesota primary residence, utilizing the $500,000 capital gains tax exemption for a married couple, and then convert the Florida rental to their primary residence.
Depending on how long Mary and John live in the Florida home, there can be reduced taxes on the Colorado gains. The longer they live there the greater the reduction based on a calculated pro-rata share of their $500,000 capital gains tax exemption. Since Mary and John plan to live in the Florida home for the next 20 years, the exemption would be approximately 90% of $500,000 or about $450,000.
Many Moving Parts and Important Details. This is an oversimplified illustration and should not be considered tax advice. Consult with your tax professional. There are many rules, strict timelines, other tax considerations (such as depreciation recapture), and due diligence factors involved with what is outlined in this example. However, it does help demonstrate that managing the timing of how and when assets are utilized can require a multi-year runway to be most effective.
And now let’s layer into this scenario Mary’s employer equity awards with vesting schedules, how philanthropic intent can factor in, possible trust structures, planning for multi-year Roth conversions, etc. Longer lead times ahead of retirement also provide the benefit of being able to utilize multiple tax years in optimizing planning opportunities.
In Summary. Working with an investment and wealth management professional who proactively models opportunities to optimize your assets – not only just ahead of retirement but all along the way – can have a significant positive impact. Already retired? An integrated plan still makes sense in identifying optimization opportunities. For instance, legacy goals and tax implications for the next generation.