Here's something I've noticed over the years: people often make important decisions based on taxes or other regulatory factors, rather than on what's truly beneficial for themselves or their families.
Of course, we all want to avoid unnecessary taxes, and the government deliberately uses the tax code to provide incentives and disincentives. So it's natural, and proper, to pay attention to these things. But we shouldn't allow them to take precedence over other considerations.
Here's an example, and I just recently came upon another case of this common phenomenon. Suppose you have children who are grown, with their own independent lives and maybe children of their own, and you can afford to help them out financially. According to federal law, if you want to give money to these children, you are currently limited to a $13,000 gift, if you want to avoid the Gift Tax. (You might be able to get around this to some extent: if you are married, each of you can give $13,000 to your child; and if your child is married, each of you can give each of them $13,000, or a total of $52,000, which is a lot. And you can do this every year.) Most people in this position keep to these limits.
But why even consider those limits? What you give your children should be based on what they need and what you can afford, not on the federal tax code. This is especially true when it comes to avoiding the "gift tax," because that tax is not very burdensome at all. First of all, your kids don't pay any tax on gifts you give them. Nor do you pay any tax, unless you give them many hundreds of thousands of dollars, or millions of dollars. All that happens is that gifts over these limits will some day reduce the amount of your estate (i.e., what's left when you die) that is exempt from federal estate taxes. Most families will not have to pay estate taxes at all, because the exemption is so big to start with. And for those that do, it's true that large gifts during your lifetime will reduce the exemption, but if you kept that money instead of giving it to your children, it would end up in your estate anyway and the effect would be just about the same, and maybe worse.
Ironically, the government's intention was not to affect how much people give away during their lifetimes, but just to make sure they weren't doing it to avoid paying taxes on their estates. Since the tax is ultimately about the same either way, it should not be an incentive to give or not to give. But a lot of people take it that way, and so they they give their children less than they can afford to give, and perhaps less than their children (or grandchildren) really need. And they also deprive themselves of seeing their families enjoy a portion of their inheritance at a time of life when the recipients probably need it the most.
This example is just one of many, but as I say, it's on my mind because I just recently was advising a client who has been limiting her gifts to $13,000 a year, although she could afford to give much more, and I had to explain this to her.
But this same thing is true about many other aspects of how people manage their financial lives, and their retirements in particular. Sure, we need to be aware of tax rules, and other rules, but we shouldn't let them run our lives. Avoiding unnecessary taxes can be fun and profitable, but if we're letting it determine our most important decisions in life, then it's time to adjust our priorities.
Chuck Yanikoski is a retirement adviser who lives in Harvard. You can reach him through his website, www.ChuckYRetirement.com.