Rollover Mistakes Could Be Irrevocable!

Debt DespairJim Lorenzen, CFP®, AIF®

According to Cerulli Associates, rollovers from 401(k)s and other retirement plans will cause IRA assets to reach $12 trillion by 2020, and according to retirement expert, Ed Slott, CPA, fully 99% of advisors  – never mind the general public; good luck – know next-to-nothing about the rollover/distribution side of the business.[1]

It’s worth understanding that every time IRA or 401(k) money is touched, it’s a gamble for those who don’t know what they’re doing.  Mr. Slott says it’s like an eggshell – he’s good at metaphors – break it, and it’s over.  He’s right.

Few people realize that if they make a mistake on the rollover, they could lose the IRA entirely – and it’s irrevocable!

A number of years ago, I wrote a report, Six Best and Worst IRA Rollover Decisions, which is available on the IFG website.   One of the mistakes I mentioned was in not recognizing that some people maybe shouldn’t do a rollover at all!

Why?  First, you have to understand what a rollover is – as the well as the difference between a rollover and an custodian-to-custodian transfer.  A rollover happens when money has been withdrawn from a 401(k) and deposited into an IRA.  When that happens, the client is required to do the necessary withholding, pay the tax and wait for a refund the following year.  A transfer of the account directly between custodians avoids that problem; but, there’s a potentially bigger one.

Here’s an example scenario:  If a rollover has been previously rolled over in the past 12 months, the entire account now becomes taxable, and there’s no fix to correct the error.   Someone with a $500,000 or $1 million (or any other size) IRA could be in for a big shock.  Taxes will be due at their new rate – this withdrawal likely puts them in a new bracket – and the money left is no longer tax-deferred!

A direct transfer would have avoided this problem.

Keep Up with New Rules

A lot of seniors have CDs and IRAs at banks.  Last year, you could do one rollover per year for each of your IRA accounts.  No more.  Now, the law is one rollover per year for ALL IRA accounts – and that includes Roth IRAs.  Two rollovers means that one of them will be no good.

Inherited IRAs

Here’s where mistakes can, and do, happen far too often; because the rules are different – and stiffer.

Did you know a non-spouse beneficiary can NOT do a rollover?  A child who inherits a parent’s IRA must be careful.  Often , because the child wants to access the money right away, an attorney  will sometimes put the child’s name on it.  When that happens, that’s the end of the account.  It just became a taxable distribution – check with your tax advisor.   It should have been set up as a properly titled and inherited IRA.   Putting the money into the beneficiary’s IRA is a terrible mistake.

 Beneficiary Designation

Too often, problems happen because people fill-out the beneficiary forms and forget them – never reviewing them.  Failure to do this only puts off the day when siblings get “lawyered-up”  because  the investor didn’t understand the true meaning of the distribution designations.

There’s more to know, of course; but, hopefully this will get you thinking… and doing your homework before making mistakes that can’t be changed.   Working with a professional who’s been down the path before can’t hurt, either.4 Simple Steps Post_001

I did create a short piece not long ago, Four Steps to a Comfortable Retirement.  You might find it worthwhile.

Enjoy!

Jim

 


 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.  Opinions expressed are those of the author and do not represent the opinions of IFG any IFG affiliate or associated entity.The Independent Financial Group is a registered investment advisor with clients located across the U.S.  He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  

[1] 401kSpecialistmag.com, Issue 2 1015.

 

The Road to Retirement = 4 Simple Steps

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Jim Lorenzen, CFP®, AIF®

When I was young, my father once advised, “Jim, just save 10-cents out of every dollar you ever earn and you’ll never have to worry about money the rest of your life.”

He always was smarter than I’ll ever be.  He was also right.  But, while I listened, I didn’t follow his advice, which puts me right with most of America.

Behavioral finance is a young science that uses psychology to understand irrational thinking.  DALBAR has been studying investor behavior for over thirty years and concludes that investors can be their own worst enemy.  They usually make bad decisions at critical points.  Example:  During October, 2008, equity investors lost 24.21% while the S&P Index lost 16.8%. [Source: Investment Advisor, June 2016]

Behavioral finance suggests investors remember losses more vividly than gains, even if the gains are greater!

Last March was the seventh anniversary of the bull market – the third longest rally in history.  Yet many have failed to realize much of the rebound due to their of buying back when the market was low.   Many may also believe that we’re in a Fed-fueled market, anyway; but, that’s another discussion.

Sometimes, the value of an advisor is in saving the client more than his or her fee on the downside.  After all, much of what investors need to do is more related to behavior than investment prowess.

4 Simple Steps Post_001Like my dad’s advice, the steps to a successful retirement aren’t simplistic; but, they are simple.

I created a short report, 4 Simple Steps to a Comfortable Retirement.  It’s not earth-shaking, but for many I’m sure it will be well worth reading.

I hope you’ll find it both informative and helpful.

You can access it here.

Enjoy!

Jim

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

RMD’s: A Quick 4-Tip Checklist for Baby Boomers

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James Lorenzen, CFP®, AIF®

Remember the 1990s?  That was when every business channel had multiple programs with business gurus picking and ranking mutual funds.  It was a time when many mutual fund managers were becoming the ‘rock stars’ of financial meda.  Everyone wanted to know what Peter Lynch, Bill Gross, and others were buying, selling, and saying.

If you were one of those following all those shows back then, you were no doubt thinking about your financial future.  And, if you were born in the years following 1946, chances are you’re a ‘baby boomer’ – a term we’re all familiar with by now.

I read somewhere that there are 65,000 boomers turning age 65 every year!  And, those turning 70-1/2 have hit a big landmark:  It’s the year – actually it’s up until April 1st of the following year – Uncle Sam begins sticking his hand into your retirement account – after all, he is your partner; and, depending on your combined state and federal tax-bracket, his ownership share can be pretty significant, depending on the state you live in.  Yes, that’s when you must begin taking required minimum distributions (RMDs).

6a017c332c5ecb970b0192ac851ba2970d-320wiBy the way, if you do wait until April 1st of the following year, you’ll have to take TWO distributions in that year – one for the year you turned 70-1/2 and one for the current year.  Naturally, taking two distributions could put you in a higher tax bracket; but, Uncle Sam won’t complain about that.

So, now that you’ve been advised of one trap that’s easy to fall into, what are some of the others?  You might want to give these concerns some thought – worth discussing with your tax advisor, as well as your financial advisor.

  1. Not all retirement accounts are alike.
    • IRA withdrawals, other than Roth IRAs, must be taken by December 31st of each year – and it doesn’t matter if you’re working or not (don’t forget, there is a first year exemption as noted earlier).
    • 401(k) and 403(b) withdrawals can be deferred past age 70-1/2 provided you’re still working, you don’t own more than 5% of the company, and your employer’s plan allows this.
    • As noted, Roth IRAs have no RMD requirements.  Important:  If you’re in a Roth 401(k), those accounts are treated the same as other non-Roth accounts.  The key here is to roll that balance into a Roth IRA where there will be no RMDs or taxation on withdrawals.
  2. Get the amount right!The amount of your total RMD is based on the total value of all of your IRA balances requiring an RMD as of December 31st of the prior year. You can take your RMD from one account or split it any or all of the others.  Important:  This doesn’t apply to 401(k)s or other defined contribution (DC) plans… they have to be calculated separately and the appropriate withdrawals taken separately.

 

  1. Remember: It’s not all yours!

You have a business partner in your 401(k), IRA, and/or any other tax-deferred plan:  Uncle Sam owns part of your withdrawal.  How much depends on your tax bracket – and he can change the rules without your consent any time he wants.  Some partner.   Chances are you will face either a full or partial tax, depending on how your IRA was funded – deductible or non-deductible contributions.  Important:  The onus is on you, not the IRS or your IRA custodian, to keep track of those numbers.  Chances are your plan at work was funded with pretax money, making the entire RMD taxable at whatever your current rate is; and, as mentioned earlier, it’s possible your RMDs could put you in a higher tax bracket.

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Fotilla Images

It’s all about provisional income and what sources of income are counted.  The amount that’s above the threshold for your standard deduction and personal exemptions are counted.  By the way – here’s something few people think about:  While municipal bond interest may be tax-free, it IS counted as provisional income, which could raise your overall taxes, including how much tax you will pay on Social Security income.  I have a LifeGuide about Retirement and Social Security available here.   Also, be sure to talk to your tax advisor.

  1. Watch the calendar.If you fail to take it by December 31st of each year – even if you make a miscalculation on the amount and withdraw too little – the IRS may hit you with an excise tax of up to 50% of the amount you should have withdrawn!  Oh, yes, you still have to take the distribution and pay tax on it, too!   There have been occasions when the IRS has waived this penalty – floods, pestilence, bad advice, etc.

Remember to talk with your tax advisor. I am not a CPA or an attorney; but, of course, these are issues that come up in retirement planning and wealth management quite often, so this can serve as a starting point in your discussions.

Jim

 

RESOURCES:

LifeGuide download:  Retirement and Social Security

Thinking About Retirement + Retirement Priority Review > Download page

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an Accredited Investment Fiduciary® serving private clients’ wealth management needs since 1991.   Jim is Founding Principal of The Independent Financial Group, a Registered Investment Advisor providing retirement planning and investment advisory services on a fee-only basis.   He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriately licensed professional.  All images used in this communication are in  public domain unless otherwise noted.

 

How to Plan for a “Late Life” Income Without Giving Up Control

A road sign with financial freedom words on sky background

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Jim Lorenzen, CFP®, AIF®

Scott and Linda (not their real names) have done everything right:  They’ve worked hard, saved and invested wisely, and did all the right things.

But now, as they head toward retirement (he’s in his mid-fifties) he’s concerned about:

 

  • What the federal debt means for income taxes during what could be three decades of retirement.
  • Just what it would mean if they’d need long-term elder care later.
  • What would happen if they had a major unexpected financial set-back or outlay at a time when the markets could ‘melt-down’ again.
  • Whether all their assets will provide them with cost-of-living increases should the above happen.

They have a comfortable retirement planned and they have adequate assets, but the tax and inflation questions are enough to make them consider a further diversification approach that might help them ‘cover their bases’ without giving up control of their money.

IFGi How To Plan for Late Life Income_Case Study_001If you have over $500,000 in taxable investments (outside your 401(k) or IRAs) and are in your mid-50s, this case study might be of interest to you.

You can learn more and access it here.

While I hope you find it informative, I would caution that no strategy should be implemented unless it’s part of a comprehensive financial plan; so, this is information you may find interesting, but not advice to be acted upon.

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

A “Safe” Route to Higher Income in a Rising Rate Environment

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Jim Lorenzen, CFP®, AIF®

Think interest rates may be headed up in the future?

Looking for a “safe” way to produce a rising income if that happens?

First, the good news:  It’s pretty simple to do.  It’s called a bond ladder, but it can be accomplished using bank CDs or virtually any other fixed-rate instrument that has a maturity date.

You simply divide your money into time frames or baskets, i.e., 1 year, 3, year, 5, year, 10 years.   As each basket matures, you simply buy another basket with the same time frame.

It looks something like this:

Building a Bond Ladder

Now the bad news:  The rates may or may not keep up with inflation.  And, unless held in a long-term tax-deferred account – and many aren’t because people consider this money to be ‘liquid’ emergency money – the interest is also taxable.

For example, as I write this, according to bankrate, a 5-year CD is currently paying around 1.67%.  Someone in the 30% combined state and federal tax bracket would realize only 1.17% while inflation, according to the government calculations, is 1.1%.  In other words, you’re treading water.  And, while most people like liquidity and safety, they also don’t generally want to have a lot of money going nowhere.

There’s something else to consider, too.  Given the current U.S. government debt level and the state of the U.S. economy, there is pressure to keep rates low (it’s in the government’s interest as long as heavy borrowing continues); so, rising rates may be a ways off and slow in coming at that, while inflation – and higher taxes – just could arrive first!

If you’re stuck in low interest rate accounts, there are other options available.  Whether they are right for you would depend on a number of factors, which I’ll cover in an upcoming webinar entitled, Marooned With Low Rates?  It’ll be held on Saturday morning, June 18th and will be accessible to all of our ezine subscribers.   If you subscribe to our ezine (see side panel), you’ll be receiving an invitation soon.

Jim

 


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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Final Opportunity To Register

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LAST CHANCE TO REGISTER THIS WEBINAR:

PLANNING RETIREMENT IN AN UNCERTAIN WORLD

Tomorrow, June 4th:  9 a.m. Pacific, noon Eastern

Register here and receive our complimentary LifeGuide:  So You’re Thinking About Retirement.  It’s filled with tips, checklists, and other information you might find helpful.  So register today!

 

Your webinar host:  

6a017c332c5ecb970b01a5116fb332970c-320wiJames Lorenzen, CFP®, AIF®

Background:

Retirement Planning & Wealth Management (1991-present) serving selected private clients.  Founding Principal of The Independent Financial Group, a Registered Investment Advisor.  Jim is a CERTIFIED FINANCIAL 6a017c332c5ecb970b01a51174caed970c-120wiPLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® , earned through the Center for Fiduciary Studies in conjunction with the Joseph M. Katz Graduate School of Business, University of Pittsburgh.

Interviewed for American Airlines Sky Radio, heard on more than 19,000 flights, and by The Wall Street Journal for Smart Money.  Articles published in Insights by the Profit Sharing Council of America and the Journal of Compensation and Benefits, as well as in numerous newspapers locally and nationally.

International speaking and management consulting (1984-1996). Headline speaker at more than 500 conventions throughout the U.S., Canada, and the U.K. Clients included Foster Grant, Hobie Cat, CapCities/ABC, Hearst Corp., Independence Bank, Val-Pak, Dial-One, Inc., and scores of others.  Contributing author to more than 25 national and international publications.

Business owner – Founded, built, and sold five businesses in the publishing industry (1978-86) in Simi Valley, California.  Prior experience includes senior executive positions in consumer and commercial finance overseeing 65 offices throughout the United States and Canada.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.