IRA’S have been the ‘Ugly Duckling’ of Investments.

This Ugly Duckling has turned into the proverbial ‘Swan’ as IRA’s account for more than 8.2 TRILLION DOLLARS of Americans’ Retirement Assets, and more than 42 MILLION households count on IRA’s to fund their retirement.

IRA’s started off SIMPLE in 1974. But like our TAX CODE have grown more and more complex. These complex rules often lead to mistakes.

AND THESE MISTAKES CAN BE TERRIBLY COSTLY.

Today we’ll go over 5 mistakes you simply cannot afford to make with your IRA account.

#1 MISTAKE: ROLLOVER MISTAKES

There are 2 ways you can move or rollover your IRA.

  1. Direct Rollover/ Trustee to Trustee Transfer
  2. Indirect Rollover

In a direct rollover, either the transfer occurs Trustee to Trustee or a check is made out to the other financial institution.

In an indirect rollover, the check comes to you, and you have 60 days to deposit into another IRA or pay taxes due on the full amount.

Let’s make this simple. Always do a direct transfer. And a Trustee to Trustee (financial institution to financial institution) is best.  You do not have to worry about taxes, and you can do this as often as you like.

THERE ARE TWO BIG ISSUES with indirect transfers!

  1. When you get the money, the clock starts, and it must be deposited into another IRA in 60 days. PERIOD. Otherwise it is fully taxed, and if you are under 59 ½ there is a 10% penalty.
  2. You are limited to ONE indirect rollover every 365 days! Even if you have several IRA accounts, you still are limited to just one every 12 months.  Even if you redeposit it within 60 days, if you have done it more than once, it is a FULLY TAXABLE distribution AND you must pay the 10% penalty if you are under 59 ½!

MISTAKE #2: REQUIRED MINIMUM DISTRIBUTION (RMD) MISTAKES

At 70 ½, the Government says it wants to start taking IT’S share of the money in your IRA.  So, in come the rules and regulations that say how you must start taking money OUT of your IRA and paying income taxes on that money.

Here’s where it gets confusing.  People often don’t consider ALL their accounts.  They may have several accounts; they may have husband and wife IRA’s.  They may have 401-K plans.  In their mind, if it’s in the same tax return, it doesn’t matter where they take the money for the RMD as long as they take it. Right?

Wrong.

You can’t do that. That’s the mistake. And if you do, it’s a 50% penalty on the amount you should have been taken but didn’t.  That’s right.  HALF.  That’s what we meant earlier when we said these IRA mistakes could be costly.

  1. When you turn 70 ½ you MUST take RMD’s. If you do not, there is a 50% penalty.
  2. Husband and Wife
    –   Each spouse must take their own distribution, based upon their age.
  3. Each person must aggregate, or add up all their IRA’s to determine their RMD.  The RMD then can come out of one or a combination of accounts, just so you take out the right amount to be taxed. And you do not have to take out cash.  You can take out securities.
  4. IRA distributions are separate from 401-K distributions. They cannot be aggregated.

MISTAKE #3 YOU CANNOT ROLL AN INHERITED IRA TO YOUR IRA

So many times we’ve seen the case where someone has inherited an IRA from a parent, and they take the money out with plans to meet with someone to decide how to invest it.

YOU CANNOT DO THAT.  THE ENTIRE AMOUNT BECOMES TAXABLE AS SOON AS YOU DO THAT.

An inherited IRA must be transferred to a specifically titled ‘inherited IRA or beneficiary IRA’ AND you must start taking distributions from that IRA.

You do get a tremendous gift here. It is called ‘stretch’ provisions, and it allows you to take the Required Minimum Distributions OVER YOUR LIFETIME, effectively reducing the amount you must pay taxes on at any one time.

MISTAKE #4: BENEFICIARY MISTAKES

This one can be very easy to avoid or quickly become complicated.

  1. Check every retirement plan account. Make sure you have named a beneficiary and it is correct and the information has been updated. People forget, divorces happen and custodians make mistakes.
  2. Next, name contingent beneficiaries.
  3. Be careful naming trusts as beneficiaries. If you do, get the advice on an attorney who specializes in this area.

AND ALWAYS REMEMBER, THE BENEFICIARY FORM TRUMPS THE WILL AND OTHER LEGAL DOCUMENTS.

This is one important form!

MISTAKE #5 BEWARE OF SCAMS!

If you watch or read enough these days, you’re bound to hear some pitch or promotion about a special investment for your IRA.

Beware of any promotion that says an IRA strategy or investment is approved by the IRS.

THE IRS DOES NOT APPROVE OR RECOMMEND IRA TRANSACTIONS OR INVESTMENTS.

If you make the mistake of engaging in what the IRS deems a ‘prohibited transaction, the entire IRA is deemed to have been distributed on January 1st, and you have to pay taxes on the ENTIRE AMOUNT!

The takeaway is that IRA’s and retirement accounts are both very important to our retirement and complicated to a degree that any mistake can be very costly.

 

Owen Schrum, CIMA

President, Capitol View Investment Partners