IRA (s), Baby boomers have been contributing to qualified retirement accounts such as 401k (s), 4o3b and IRA(s) since the late 70’s or early 80’s. One of our fundamental purposes for doing this is to take full advantage of an IRA’s “tax-deferred status”. As you head down the path toward retirement, most of us believe we are well on our way to long, comfortable retirements. Because we have been contributing the max to our “qualified” retirement IRA (s).
As an advisor, you want to help your clients prepare for their golden years in the best way possible. With that in mind, here are 10 IRA planning mistakes that many investors make.
But before we get into the Top TEN IRA Mistakes Baby Boomer Make, lets examine what I like to call the Top 3 Myths associated with IRA’s
1. Tax – Deferred, we have been taught that we get to defer the tax. True, lets change defer taxes to Tax – Postponed! This is the 1st thing qualified retirement plans do.
2. Not only does an IRA Postpone the Tax – Deferral period, it also postpones the Tax Calculation?
3. If it postpones the tax and the tax calculation, any idea what tax bracket you will be in when you decide to retire? For many baby boomers you will be in the same or higher tax bracket. (let that sink in)
One of the American Dreams is a happy healthy retirement. With this dream comes this thought of I will be in a lower tax bracket when I retire? Don’t get me wrong here, do you really want to be in the lowest tax bracket? I know double edged sword, true! Yes, we want to take our money out in the lowest marginal tax rates but we don’t want to be in the lowest tax bracket that would give new meaning to rice and beans.
Lets move on to the TOP TEN IRA Mistakes…
Oftentimes, spousal beneficiaries will roll an IRA into their own IRA. Many families will benefit from a more tax efficient option. Leave it in the original owner’s name. For instance, if the spouse beneficiary is under 59-and-a-half, they may want to leave the assets in a “Beneficiary IRA”. This will allow for distributions free of the 10 percent premature-distribution penalty. That apply if one took distributions after the account was rolled over into the survivor’s name.
Be sure to understand that separate IRA (s) may be established for spouses with little or no income. Those additional retirement savings can add up over time. Even if the working spouse is covered under a retirement plan at work, the contribution on behalf of the non-working spouse may be fully deductible. Providing the couple’s adjusted gross income is below $150,000 for the year.
If you are over 50 do not forget IRA “catch-up” contributions. Currently set at a maximum of $1,000 in 2017. Also keep in mind that most plans allow for contributions for IRA’s up to $6,500 each year.
IRA (s) are considered “Income with Respect to a Decedent” (IRD). One should be advised that beneficiaries can take an income-tax deduction for any estate taxes they paid on the IRA. Tax code 691(c) provides relief from double taxation for recipients of IRD in the form of an income-tax deduction equal to the estate taxes paid on the IRD.
Changing the actual ownership of the IRA to a trust causes immediate taxation. Simply name the trust as the IRA beneficiary. Make sure to confirm that using the trust as the beneficiary is really necessary. Individuals have been known to name trusts as their beneficiary even when leaving assets outright to a beneficiary may have provided a better outcome over the long term.
Analyze the new rules regarding required minimum distributions (RMDs) and avoid taking out too much or too little—and getting taxed. A 50 percent penalty applies to any RMD not taken in a timely fashion. A larger penalty like this is an excellent reason to get your clients to consolidate all their retirement accounts and ensure that no distributions are missed.
Do you know why December 31 or September 30 of the year following the year of an IRA owner’s death is important? Cash-out and distribution rules are vital to remember. As mentioned earlier, a stiff 50 percent penalty applies to distributions not taken in a timely fashion. Remind beneficiaries that any RMD due to the deceased in the year of death must be taken by December 31 of that year.
In 2017, contribution limits for IRAs increased to $6,500 with the $1,000 catch up for those 50 and older. Other wise the contribution amount is $5,500 as a standard limit.
Avoid distribution of the IRA assets to the owners’ estate by listing beneficiaries. Make sure to update designations and coordinating them with estate planning documents. Having distributions made to an estate could forfeit dozens of years of potential tax deferral for beneficiaries. Stat: 80% of all american retirement account beneficiaries are improperly set up Investor News Weekly. Call us for a Beneficiary Review.
The “Stretch IRA” allows non spouse beneficiaries to maximize payouts over their life expectancy—if they know how it works. This plan can also allow non spouse beneficiaries to extend distributions from the account over their own lifetimes, after the owner’s death.
In the end we all have a few things in common associated with our IRA’s and our retirement. We all want our accounts to get bigger , we all want to have enough income to last as long as we do and we want to make this happen while taking on as little risk as possible. Comment below or contact me at 1-800-694-3175 , email me at firstname.lastname@example.org