Jim 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 A rollover happens when money has been withdrawn from a 401(k) and deposited into an IRA.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.
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.
