If I Had A Million Dollars…

[Warning, I’m not a lawyer or accountant. Contact someone in one of both these professions before setting up a trust for anything.]

Over the past few weeks I’ve had a similar conversation with a few different people all floating around the topic of what we would do with a large sum of money. There is usually no a specific dollar amount named; it’s almost always in a vague ” when I get rich” sort of amount. We all have different ideas. Several Texans have said they would open up a Whataburger in Nashville.

I don’t think any of us have any real belief that we will ever get to that undefined “when I get rich” amount, but it got me thinking of how I can get my kids there.

So I’ve come up with a plan: the retirement reimbursement trust.

We are at the point in our society that individuals have to take responsibility for their own retirement. Pension funds are pretty much nonexistent, and even when they are still around, like teachers retirement funds, they are usually underfunded by state partners.

The idea of the trust is to encourage family members to save for retirement by reimbursing them however much they save in their retirement funds every year.

It starts out as seed money to start young people’s retirement funds as soon as possible. The kid works a summer job that qualifies them for an IRA? The parents put that amount in a ROTH IRA for them.

Once they get to be adults and get “real jobs” the trust moves into the reimbursement phase. Whatever the kid puts into their retirement funds, whether it be a 401(k) or 403(b) though work or even a Simple IRA, the trust cuts them a check for that amount after the kid files their income tax forms.*

This really helps the kid in two ways – it encourages them to save for retirement, and lets them live comfortably throughout their life, no matter what they choose to do.

A lot of careers that do good, important work like teaching, the ministry, and non-profits never seem to get paid as much as they should. With a retirement reimbursement trust no one would have to pass on a career because they would never be able to afford a house, or kids, or anything newer than a three year old Camry. The trust lets them use their entire salary to live, while still ensuring their retirement is comfortable.

Brass Tacks

Lets go over some numbers that might help illustrate my point. Even though these numbers change every year, I will use 2015 amounts to keep things simple.

Lets assume C and G are both working the same job, at the same level and get paid the same amount.

C is part of a retirement reimbursement trust, but G is on his own with retirement.

We’re starting with the Metro Nashville Public School starting salary of 42,082.10.**

They have both 401(k) and 403(b) options that top out at $18,000, and workers can contribute to their own IRAs, which top out at $5,500.

401(k)/403(b) 18,000
IRA/ROTH IRA 5,500
Total retirement contributions possible 23,500

If G went by the traditional adage of saving 20% of their income he would put aside $8,416. That’s not an insignificant sum of money, and would be orders of magnitude more than what many people save for retirement. This amount would be enough to max out an IRA or Roth IRA, and probably max out any 401(k) matching offered. G, for the most part, is doing pretty good.

If C went by the same rule of thumb and also saved $8,416, she would be $8,416 better than G, and would now have a nice tidy sum that can help her pay down student loans, put a down payment on a car, or – if she banked it for a couple of years – a down payment on a nice house.
C can also start saving more for retirement without affecting her quality of life. She can slowly, over a few years, add to the retirement percentage until it reaches that $23,500 a year limit. C would be saving half of her annual salary in retirement, potentially letting her retire much, much earlier than G, while still being able to use her entire salary.

Taxes

(remember, only using 2015 numbers)

There’s two that come into play here: annual gift tax exclusion amount and the lifetime gift exemption amount.
Annual gift tax exclusion amount: Each year someone can receive up to $14,000 from an individual.
Lifetime gift exemption amount: Over someone’s lifetime they can receive $5.43 million.
The trust would cut a check for, at most, $23,500 a year.

Retirement $23,500
Annual gift tax exclusion amount: $14,000
Amount over exclusion amount: $9,500

Each year the trust would update the IRS on how much they give over the $14,000, and they would take that off the top off the lifetime exemption amount. There’s no chance of ever reaching that $5.43 million limit this way.

Variations on the Theme

Depending on how much is in the trust, or how many people are pulling from the trust, there may not be enough money for the full $23,500 per person per year. It’s really a mater of sustainability over the long term. This is where an accountant, tax attorney, or financial planner comes in handy.

So here hare some ideas:

• Max out the reimbursement of 20% of the salary.
• Cover IRA/Roth IRA contributions
• Cover up to $14,000, or the max tax-free gift allowed

* For simplicity sake this plan doesn’t cover 401(k) matches, company stock plans, etc. For the sake of this plan all those are simply considered bonuses.

** Side note: this salary, for a certified teacher with a bachelors degree, is the same for those with zero years of experience, to those with EIGHT years of experience. What other industry does fresh-from-college worker get paid the same as someone with eight years of experience?)