Rick Kahler recently warned about two bad mistakes people make with their individual retirement accounts.
Kahler, the founder of Kahler Financial Group, in Rapid City, S.D., gleaned these warnings from Jeff Levine of Fully Vested Advice, at the 2018 spring conference of the National Association of Personal Financial Advisors.
Rick Kahler is back with three more mistakes you can make on inherited IRAs, required minimum distributions and beneficiary designations:
LARRY LIGHT: Inherited IRAs are a can of worms for a lot of people. Explain why, please.
RICK KAHLER: Failing to understand beneficiary options on inherited IRAs is widespread. You may well be among the millions of Americans, most of them spouses, who will inherit IRAs. Knowing the options you have can save you thousands of dollars in benefits and taxes.
Spouses have the right to remain as a beneficiary of the plan or roll it over into their own IRA. Which to choose depends upon the age of the person who has died, and the age and financial needs of the beneficiary. The “99% rule” says beneficiaries under age 59½ should retain the plan as an inherited IRA; those over 59½ should roll it over. The “1%” scenario is when the deceased spouse was over age 70½ and the beneficiary is more than 11 years younger. A rollover is best if the beneficiary doesn’t need any IRA distributions until after age 59½.
Another option for IRA owners is to name a trust as the beneficiary of the IRA. Levine suggests not doing this if you can accomplish your goals without it. But there are many cases when a trust will accomplish things that giving the IRA outright to a beneficiary won’t do.
Estate planning attorney Ilene McCauley, from Scottsdale, Arizona, says some of those instances are when you want to protect the IRA from a divorce of a beneficiary or guarantee that the proceeds go to your children when your spouse dies or remarries. McCauley recommends using a living trust as the IRA beneficiary rather than a testamentary trust established through a will.
LARRY LIGHT: Another problem area is taking required mandatory distributions, or RMDs. The simple thing to understand is that you must withdraw a given amount from your tax-deferred retirement plans after 70½. But you don’t have to take it from each IRA. You can combine, or aggregate, the accounts and choose among them which you want to take money from, and pack it altogether in one check. But there are some complications, right?
RICK KAHLER: RMD aggregation rules are widely misunderstood even by advisors. Levine asked the group of about 50 advisors this question: “If a 72-year-old client had two traditional IRAs, two 401(k)s, and two 403(b)s, how many RMD checks would need to be issued?”
Only three advisors got the right answer—four checks. You can aggregate the RMDs from the two traditional IRA accounts and take the combined RMD out of just one account. You can do the same with the two 401(k) accounts. But with the 403(b) accounts you must take the RMD separately from each account. You can’t aggregate them or you face penalties and taxes.
LARRY LIGHT: Then there are problems with designating IRA beneficiaries—who you leave the accounts to after you die. Tell us about these.
RICK KAHLER: Not doing periodic reviews of IRA beneficiaries is where a lot of people run into trouble. It’s important to review your IRA beneficiaries regularly. This is especially crucial when a beneficiary dies or you get remarried.
For example, assume you want your employer’s retirement plan to go to your children upon your death. You remarry, but don’t have your new spouse sign a disclaimer waiving rights to your retirement plan. If you die after one year of marriage, your new spouse, not your children, inherits the employer’s retirement plan funds.
The reverse is true with an IRA or a 403(b). Let’s assume you listed your kids as the beneficiaries on either of these accounts. If you remarry and want the proceeds to go to your new spouse but you forget to sign a change of beneficiary form, there is no one-year rule as there is with an employer’s plan. Your kids, not your spouse, will inherit the account.
The bottom line is that, to get the most benefit from a retirement plan, you need to do your homework and seek appropriate advice. The money you save by avoiding IRA mistakes can make a big difference in your security and standard of living in retirement.