I.R.S. RULING MIGHT CREATE TIMING ISSUES

Jim Lorenzen, CFP®, AIF®

On August 14th, the IRS ruled (Revenue Ruling 2019-19) that uncashed distribution checks from qualified retirement plans are taxable.

Oops!  That means that those requesting distributions, including RMDs should do it early enough in the calendar year to avoid any year-to-year carry-over confusion.   So, a distribution check issued in July, for example, will be taxed for that distribution in the year it is received, even if not cashed or rolled-over.

Those who leave companies and expect future distributions from their 401(k) from that company should update any change of address information – taxes, it appears, will be due on that money even if the check never reaches them.

Why did the IRS make this ruling?  According to retirement guru and CPA Ed Slott, the ruling was intended to address a question that has long been faced by retirement plan administrators – what are their withholding and reporting obligations when a check they issued goes uncashed?

So, the distribution is recorded in the year it’s distributed….  Good to know, huh?

Jim


Jim Lorenzen, CFP®, AIF®

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.

Getting Ready to Take a RMD? Here’s a 4-Point Checklist.

Jim 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).

By 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. Fotila Images

    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.

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.   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 (and I don’t play one on tv); but, of course, these are issues that come up in retirement planning and wealth management quite often.

Happy retirement!

Jim


Jim Lorenzen, CFP®, AIF®

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.

Worried About the Markets? Maybe you should(n’t) try alternatives – part 2.

Jim Lorenzen, CFP®, AIF®

In my last post, a talked about how the financial planning profession has changed dramatically since I opened my first office in  1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.

I talked about how the financial product manufacturing, marketing, and sales channels represent an industry that exists alongside – not necessarily a part of – the financial planning profession.  It doesn’t help, of course, that anyone can call themselves a financial planner – but I digress.

Alternative investments (alts) represent one example, which I discussed in the last post.  Another alternative investment is deferred annuities.

People love guarantees.  Marketers know this and the use of the word virtually always gets investors’ attention – particularly those who’ve amassed significant assets and are contemplating retirement.

The media – always on the alert for something they can hype or bash for ratings and typically lazy – find it easy to highlight high costs and shady salespeople.   And, there’s some truth to that.  Guaranteed income or withdrawal riders and equity indexed annuities do tend to have high costs.  Often the guarantees that are less attractive than those presented.

The cost-benefit argument could, and probably will, go on forever.   I have other issues.  The first is, does an annuity make sense at all?  – Any annuity.   There’s no tax-deferral benefit if used inside an IRA and it limits your investment choices.  They also often have surrender charges that enter into future decision-making; but, even when there are no surrender charges, the withdrawals can harm performance or even undermine the guarantees that were the focus of the sale.

For me, here’s the big issue:  the annuity creates something most of my clients no longer want any more of – deferred income (who know what future tax rates will look like in 10-15 years as government deficits climb?  Deferred income comes out first and is taxed at ordinary income tax rates.

Deferred income in non-qualified annuities (outside IRAs, etc., funded with normally taxable money) is income in respect of a decedent (IRD) and does not get a step-up in cost basis at the death of the holder – someone will pay taxes on the earnings and they may be in a higher tax bracket or the IRD may put them there.

There may be other ways to invest using alternative strategies.  Options can work, but they also carry additional costs and risk.

Talk to your advisor –  maybe one with recognized credentials and willing to take fiduciary status might be a good idea – to see what your plan should be.


Jim Lorenzen, CFP®, AIF®

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.

Worried About the Markets? Maybe you should(n’t) try alternatives.

Jim Lorenzen, CFP®, AIF®

The financial planning profession has changed dramatically since I opened my first office in 1991; but, the financial services industry – not to be confused with the profession that operates alongside it – seems to have changed little, though it’s changed a lot.  What?  I’ll explain.

The industry, comprised largely of product manufacturers and their sales arms (these days it seems anyone can say they’re a ‘financial advisor’), has a long track-record of constantly packaging new products to take advantage of a demand among investors that the product manufacturers create through their marketing.   New ‘issues’ (created by marketing) give rise to new products to be sold to fill a marketing-driven demand.  Changes in product innovation to generate new sales is the constant that never changes.

This doesn’t mean it’s all bad; it’s just that it can be difficult for spectators to recognize the game without a program.

Alternative investments get a lot of press these days – especially if there’s a perceived risk of a down or bear market… a perception that’s convenient to exploit at almost any point in time.  The media likes ratings, so profiling people that called a market top or decline – and made money – is always good for attracting an audience.  And, since there’s always someone on each side of a trade, finding someone on the right side isn’t difficult.

I’ve always felt that many fund managers operate like baseball free agents.  Being on the right side of a call gets them on tv, which in turn attracts new assets, which in turn leads to bigger year-end bonuses.  I could be wrong, or not.

Many captive “advisors” are putting their clients into “alts” these days because their employer firms (the distribution arm for the product manufacturer) are emphasizing them.

My sales pitch for alternatives:   With alternatives, you can have higher costs, greater dependency on a fund manager’s clairvoyance, less transparency, low tax-efficiency, and limited access to your money!  What do you think?

Don’t get me wrong.  It’s not a black and white decision.  They can have a place in a well-designed portfolio; and, while many endowment funds and the ultra-wealthy do tend to own alts, most of us aren’t among the ultra-wealthy and risk mitigation is important.

More about alternatives next time.


Jim Lorenzen, CFP®, AIF®

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.

ROLLOVER MISTAKES CAN BE COSTLY

Jim Lorenzen, CFP®, AIF®

… and mistakes are more common than you might think.

IRA mistakes generally revolve around errors associated with required minimum distributions (RMDs), hardship distributions, and distributions involving pre-tax vs. after-tax funds; but rollover errors can create special headaches.  Ineligible rollovers are often taxable (unless they are after-tax funds) and could be subject to a 10% IRS penalty.  Not good.

According to retirement expert Ed Slott[i], the biggest three ineligible rollovers are:

>  Violations of the one-per-year IRA rollover rule

>  Missing the 60-day rollover deadline.

>  Distributions to non-spouse beneficiaries (a non-spouse beneficiary can never do a rollover.  The funds must be moved as direct transfers).

Those are only the top three; but there are many other lesser-known rollover tax-traps.   If you’re retiring and planning a rollover, you might consider getting professional help.  You can find a CERTIFIED FINANCIAL PLANNER® (CFP®) professional here.

Naturally, if I can help, you can get things started here.

Here’s an IRA Rollover Checklist you might find helpful, as well as a little insight about How To Get Value from an Advisor Relationship.

Jim

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[i] El Slott is a CPA based in Rockville Centre, New York, who has appeared on PBS and is the author of several books on IRAs.


Jim Lorenzen, CFP®, AIF®

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.