Guest Author: Ronit Rogoszinski
In the last two months we discussed living within your means and the different strategies you can employ to help you achieve your financial goals. One of the most asked about goals is saving for and preserving retirement savings. Today I will review the 5 most common mistakes I’ve seen clients make in setting up their retirement savings accounts and the eventual transfer of those assets upon their death.
Failing to Complete an Indirect Rollover Within 60 days
You have only 60 days to redeposit funds withdrawn from a retirement plan, including amounts withheld for taxes, to another qualified retirement plan or risk losing the tax deferred status of the investment. What that means is that if you are to “move” your IRA, for example, from one bank to another bank’s IRA, a DIRECT rollover means the account owner requests that the custodian of the receiving account “collect” the funds from the institution currently holding the account. This is also referred to as Trustee to Trustee transfer. The INDIRECT transfer means that the individual personally transfers the funds from the qualified account in one institution to another qualified account at a different institution, usually in the form of a check payable to the IRA owner. If the funds aren’t deposited in the new institution within 60 days of the distribution date, taxes and any associated penalties will be due.
Suggestion: Whenever possible choose DIRECT rollover or transfer between the two institutions.
Spousal Continuation Mistakes
• When one of the spouses passes away, the surviving spouse has the option to treat her late husband’s IRA as her own, or roll the IRA over into her own IRA. Sometimes that may not be the best option.
- When the surviving spouse is under 59½ and needs income, there is no 10% penalty on distributions from the IRA kept in the deceased spouse’s IRA.
- When the surviving spouse is older than 70½, doesn’t need income now, and her late husband was younger than 70½, she may keep his IRA in his name. This will allow her to delay mandatory distributions from his IRA until the deceased spouse would have turned 70 ½ had he not died.
- Finally, (please confirm this with your accountant), if the applicable federal estate tax exemption has not been fully used, the surviving spouse may want to “disclaim” rights to a portion of the IRA up to the amount of the applicable exemption.
Failing to Name a Beneficiary
Whatever you do, don’t make this mistake!! Unlike many other properties, IRA’s don’t pass by a will; they pass according to the terms of the IRA Beneficiary Designation Form. Therefore, this document could be one of the most important estate planning documents. Here’s what can happen if you overlook it or neglect it over time:
- The default beneficiary will generally be the owner’s estate.
- This most probably will cause the loss of the “stretch” option and spousal continuation options discussed previously.
- The distribution will have to be done lump sum or within five years after the death of the owner. Note – if the IRA owner was older than 70½ when he passed away, the estate may continue to take distributions over his life expectancy as if he had not died.
- This may also cause the IRA to have to be probated which adds cost, consumption of time and a public process, all which could be avoided by an updated Beneficiary Designation Form.
- Income tax rates are usually higher when IRA’s are paid to an estate, costing additional dollar lose to the account’s value.
Failing to REVIEW and UPDATE Beneficiary Designation Forms
As we just discussed, the named beneficiary on the designation form is entitled to the assets of the IRA. Therefore, you need to review the designation form at least annually or upon life events such as birth or adoption of a child, marriage, divorce or death of a family member. Not reviewing and updating the document could lead to an unintended member of your family inheriting your assets upon your death. Also, please note that if your grandchildren are named as beneficiaries, make sure the value of the IRA and any other assets passing to the grandchild do not exceed the applicable generation-skipping transfer tax. To the extent that it does, there could be additional taxes due. Please consult with your tax advisor.
Suggestion: Set up a reminder to review beneficiary designation form annually and update according to changing circumstances in your life. This will ensure unintended beneficiaries from inheriting your IRA’s.
Beneficiaries Fail to “Stretch” the IRA
Should a beneficiary liquidate the inherited IRA too quickly, it could result in immediate taxes due and prevent the assets of the IRA to provide possible long term income. The stretch feature of an inherited IRA has certain advantages:
- Beneficiaries may spread tax liability over their lifetime.
- The undistributed IRA assets will continue to be invested in a tax deferred manner, even as distributions are occurring each year.
- Additional IRA assets can be accessed as needed.
There are additional issues to be reviewed and discussed regarding IRA's. You will have to tune in next month to learn about the next group of mistakes IRA owners make in setting up, managing and ultimately passing their retirement assets on to their heirs.
Ronit Rogoszinski has been helping individuals and professionals understand the world of finance and wise personal money management for over twenty years.
A graduate of Queens College’s Scholars Program, Ronit holds FINRA Series 7 and 66 registrations through LPL Financial and is New York State certified in Long Term Care Insurance. As the proud mother of four children, Ronit understands firsthand the demands we all have in our fast paced lives. Yet her calm, personal and relaxed nature help to put her clients at ease while remaining focused on the job at hand – realizing and bringing them closer to their financial goals.
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