Is there any way to enter a pension into the Lifetime Planner that is not subject to income tax?

LeaningTower

As indicated in the subject line, I have a pension that is not subject to income tax. I'm looking for a way to enter this lifetime income which includes a benefit for my beneficiary upon my death, but exclude the pension from income tax calculations.

I already considered and rejected simply lowering my average tax rate because in the future, as inflation devalues the pension, more and more of my income will come from retirement/investment account distributions. This would require adjusting the average tax rate every few years, which Q's Lifetime Planner does not permit.

I also considered and rejected entering the pension as Other Income because that function does not easily allow us to set an end date for the income that matches my end of life. Nor does it allow me to set it up as a joint life annuity to provide an on going pension for a beneficiary. (I could manually enter those, but that would be a lot of work if/when I want to change my life expectancy in Planner to run different scenarios.)

I doubt there is an easy and practical way to exclude this pension from income tax calculations. But I'm hoping someone out there can suggest an alternative I've overlooked

Quicken Kristina

Hello @LeaningTower,

To answer your question, I'm not aware of any options to mark a pension as non-taxable or tax deferred. I'm not seeing anything in the program itself, nor am I finding any directions on how to do so in the help article about adding a pension to the Lifetime Planner.

Depending on what kind of pension this is, maybe this article on tax deferred savings can help:

https://help.quicken.com/display/WIN/Tell%2Bme%2Bhow%2Bthe%2BLifetime%2BPlanner%2Buses%2Btax-deferred%2Bsavings%2Binformation

I hope this helps!

NotACPA

@LeaningTower Does that pension have a current value that you can determine?

If so, I'd be inclined to set it up as a non-investment Asset type account and simply record a transfer from the account with every payout that you receive.

Then, whatever's left when you die is the death benefit.

Also, Is the amount that you receive even reportable to the tax authorities?

LeaningTower

https://community.quicken.com/discussion/comment/20461850#Comment_20461850

Hi NotACPA,

To answer your questions:

1. None that I can reliably determine. I suppose a financial analyst might be able to estimate the lifetime value of the pension and discount it to NPV (net present day value). But that would entail multiple assumptions and projections, which would introduce more uncertainties into the plan.
2. Yes, it is definitely reportable. 40(ish)% is taxable and that portion is definitely reportable on a 1099R. I'm better than 90% certain that the entire amount is reportable, even though only approximately 40% is taxable.

The death benefit is not a fixed dollar amount. It is 50% of the monthly amount that I receive, which will then be paid for the life of the beneficiary (It could be nothing, if the beneficiary pre-deceases; or it could be paid for many, many years.)

NotACPA

OH MAN, is this getting complicated.

1st, I think I'd ignore the death benefit, at least for now … since, really, it can't be fully known. When you die, let your beneficiary worry about it.

Since part of the pension is taxable (will you have taxes withheld on the payment?) I think that you're looking at a Memorized split transaction, 1 line of the split would be assigned to a category (that you create) that has a 1099R tax line associated. If taxes are withheld from the payment, another line would go to a Taxes category. And the remainder would go to another category, that you create, with no tax line associated.

You can schedule this transaction for the payment date and have it either remind you to input it, OR have it automatically input X days in advance.

But, after all that typing, I'm unsure as to how this would play out in the Lifetime Planner, since I rarely use that.

Boatnmaniac

Quicken does not have a good, intuitive means for managing annuities of any kind. I'm pretty sure that is perhaps due to the very large variety of annuities that are available so it's very challenging to be able to account for them all. There are work-arounds that can be used but they are not always simple or easy to manage.

Since your focus seems to be more about how to account for your pension annuity benefit in Lifetime Planner and not in your actual income picture (outside of Lifetime Planner), I don't think that setting up an account for it in Account List would be the way to go since Lifetime Planner wouldn't be able to track that tax-free income properly….at least, I haven't found a way for Lifetime Planner to be able to manage it correctly.

As much as you might not want to use the Other Income option, I do think it would be your best option because:

1. It is a Pension income, not an Asset or Investment Account income.
2. It allows for setting the annual income to be fixed with no appreciation for COLAs or inflation in future years.
3. It allows for setting the income as tax-exempt.

The biggest issue with this Other Income option, IMO, is that you would need to enter the number of years that the pension would provide income to you. So, yes, this would make it a little more work to adjust if you decide to change your life expectancy projections. But that is not an insurmountable issue because you could change the start date to the current date and adjust the number or years accordingly. A bit clunky but, IMO, very doable. The main concern I'd have with having to do it this way is if I forgot to make that start date and number of years change.

Regarding the joint benefit: I'm assuming you mean that it would be your benefit while you are alive and then it would become her benefit after your death. If that is the case, you could then set up a 2nd Other Income which would start with when you die. Quicken does provide the option to select this so if you change your life expectancy the start date for her Other Income will be automatically adjusted. But, again, there's that pesky number of years that would need to be manually adjusted every time you want to play around with your and/or her life expectancies.

Or, if your wife would instead get a lump-sum benefit upon your death, you could still set up a 2nd Other Income entry. Just make it a 1X income event starting with your death.

What you might want to consider doing is to suggest a change to Lifetime Planner for Other Income so in addition to, or other than, specifying the number of years to provide the same drop-down options for the End Date as are currently provided for the Start Date. That would allow you to play with both of your life expectancies and the Other Incomes for both and her would be automatically adjusted to reflect that. But that improvement is not something what would/could be implemented short-term. If you wish to suggest this a product improvement idea, you can do that here: https://community.quicken.com/categories/product-enhancements-windows .

LeaningTower

Thanks to everyone who posted. My responses, in no particular order:

The linked article on entering pensions into Lifetime Planner (hereinafter: LP), didn't address my questions, but it did point out that Quicken is still using age 70 1/2 for RMDs, even though the age was raised to 72, and I think it was raised again to 73. Hopefully, Quicken will update the software to reflect this change. This might be one more Product Enhancement I should request.

thanks for the advice re: entering the monthly pension payment as a Scheduled Transaction. I had already done so. ("Great minds…" and all that.) But my question is specifically about accounting for and/or projecting this income, and the tax on it, in LP.

Entering the pension income as "Other Income" certainly is possible. But I like using the "What If" function to test various possibilities, combinations and permutations, but changing all those factors in Other Income…. Well, I would say calling it "clunky" is being too generous.😆

I searched for any ways to modify or customize the tax rate. But that is limited to just an average rate for all income, regardless of type or source (i.e. earned income, qualified/non-qualified dividends, long/short term cap gains, etc etc. But it seems to me if Quicken allows setting a custom rate on tax liability for "other income" adding the same drop down menu option for retirement income should not be a "heavy lift" for the programmers.

Unfortunately, it looks like I was right that Quicken does not offer an easy way to do this. But I'm still hoping someone in the community knows, and will share, something we're missing.

Scooterlam

I think the ideal solution would be to add "tax rate" to the pension dialog (below). But that would require a development change. Don't hold your breath.

You mention your beneficiary will get 50% of the annuity and your desire to set the tax rate at 0%. I looked at 2 scenarios. The first assumes 100% benefit to the beneficiary. The second one applies to your case, I think, where there is something other than 100% conveyed.

SCENARIO 1: If 100% of the pension goes to the beneficiary, then just setup an Other Income assumption with an Income Period of 99, to ensure extension beyond either of your death dates and set the Tax Rate to 0% - so neither federal or state taxes. See image. This scenario requires no further adjustments on your part should you play what-ifs around your death date. In essence, at 100% either you or you beneficiary will get the full income for the combined lifetime.

SCENARIO 2: If something less than 100% goes to the beneficiary, then setup 2 concurrent Other Income assumptions. See image below.

The first income stream (for the pension owner): Set your pension start date, set your income period to correspond to your death date (relative to your start date) and tax rate to 0% - so neither federal or state taxes.

The second income stream (for the beneficiary): Set their start date when the pension owner dies, set income period to 99, set the income to what ever percentage the death benefit is in dollars and a tax rate to 0%. Note that both incomes are in today's dollars. You may need to add a note to review these income figures on a regular basis.

So ….. Scenario 2 requires, one change to the owners pension "other income" stream when you are doing what-ifs on the death age. That is, when you change the owners death age assumption, in "about you", also change the pension owner income period to correspond to your new death date (death date - pension start date). There is no need to adjust the second income stream for the beneficiary as it starts when the owner dies and the income period is set to 99, well beyond the plan horizon.

Not ideal but perhaps workable for you. You can run some permutations on the death assumptions for you and spouse, check the Plan Summary Tables to see if it working as expected. I tested it for several scenarios and found it worked as expected, given your requirements. Have a try.

Regarding the RMD age, there is an IDEA post out there, just search.

markus1957

I have an annuity and use 2 entries in Other Income, one for the non-taxable return of premium and one for the taxable portion with a custom tax rate. For your case, you would need to estimate the payment period for your life expectancy and add 2 more Other Income entries at 50% for the spouse benefit with a start date of your estimated death and a payment period that corresponds to your spouse's life expectancy.

Yes, if you what if life spans you will have to make more adjustments, but you will have a fairly accurate projection for the stated case.

Boatnmaniac

@LeaningTower - Looks like there are 3 of us who are all suggesting using Other Income for this but with some variations. I have not been able to identify any other options that would provide equal or better results, regardless of level of effort.

The more I look these 3 suggestions, and if I am correctly understanding your Pension Annuity beneficiary terms, the more it seems to me that @Scooterlam's Option 2 is very similar to what I'd suggested but with a key difference that would make it a little less "clunky" (sorry, I know you think it is more than cluncky): I had stated that you would need to change the Start Date for your Other Income entry….not sure what I was thinking. No, you would not need to do that. Just enter your new end of life date and change the number of years the payments would occur for both your Other Income entry and for your beneficiary's Other Income entry.

Also, if your beneficiary will also get a 1X death benefit from your Pension Annuity, setting up that 3rd Other Income event would be simple with no adjustments to be made in your scenarios assessment: Just set it up to start when you die and make it a 1X payment.

So, just 2 simple changes when you do your various scenarios (in addition to changing your death date).

Also, I like how @Scooterlam laid out his Option @2. Very simple to follow and understand.….proves that a picture can be worth a thousand words.

BTW, I make extensive use of the "What If" tool in Lifetime Planner, too. It's a great way to see the effect of change(s) to the assumptions without having to actually change the plan you want to keep.