To Roll or Not to Roll

That’s the rollover question. Do you have the answer?

Jim Lorenzen, CFP®, AIF®

Getting rollover advice isn’t always straightforward.

There’s a difference between a “financial advisor” or “financial planner” who really uses “planning” as a vehicle to sell products – yes, Virginia, they do exist – and a true advisor/planner who provides independent and objective analysis as a part of his or her service to clients.

Wasn’t that commercial subtle?

Nevertheless, when deciding whether or not to roll over your company retirement plan to a self-directed IRA, there are considerations and analysis to be considered before making this irrevocable decision.

Here’s a brief – read that as ‘oversimplified’ and incomplete – hint of the types of issues you should consider:

Sample of 401(k) issues:

  • Maybe no required minimum distributions (RMDs) when you hit age 72 if you’re still working and not a 5% owner of the business you work for.   Maybe.  You need to check with your plan administrator – some plans still require RMDs even if still employed.

  • Expenses in the 401(k) plan may be less.  Maybe.  This is a murky area as some plans are sold to employers as being ‘free’.  It’s a myth, of course, as often costs may be hidden even from the company plan sponsor.  Often plans offer a large menu of options, but not all are ‘open architecture’; many are pre-packaged.  Your financial advisor should be able to provide a full independent comparison expense analysis of your plan holdings vs. the IRA holdings you’re considering.

  • ERISA protections (Employment Retirement Income Security Act) protect your 401(k) assets from creditors (except IRS levies).  Only qualified ERISA plans have this protection – 403(b) plans offered by state and local governments might not qualify for this protection.

Sample of IRA issues:

  • You can contribute as long as you’re working, regardless of age.

  • Unlimited menu of investment options.  Many do not allow self-directed brokerage

  • Not protected by ERISA but rollovers is protected under federal bankruptcy law.  Amounts not rolled over (money from other sources) are protected up to $1 million, indexed for inflation every three years.
  • Option to convert an IRA to a Roth IRA.  You’ll need to pay taxes on the conversion – and they should be paid from other assets to capture the full advantage – and the Roth IRA will need to be funded for at least five years with the owner reaching age 59-1/2 (or disabled) when distributions are made.   The current historically low income tax rates are set to expire in 2026 and could be replaced sooner.  Taxes appear to be ‘on sale’ now – so this is an attractive option for many taxpayers, particularly in light of the SECURE Act, but that’s another subject (see SECURE Act under Categories on the right side panel of this blog).

Remember to plan BEFORE you act.  Ready, fire, aim seldom works out well.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  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.

RMDs: We’re Baaaack!

The 2020 RMD waiver is coming to an end. They begin again in 2021!

Jim Lorenzen, CFP®, AIF®

 

The headline says it all.  But, this is a blog; so I guess I’d better elaborate a little.

RMDs do NOT apply to Roth IRA owners, unless it’s inherited.  

If you take more than the required minimum distribution, that’s not a problem; but, distributions of less than the required amount will result in a penalty:  50% of the RMD shortfall!  For example, if your RMD for 2021 is $25,000 and you take only $20,000, you’ll still have to take the $5,000 remainder and the IRS will take 50% of that shortfall amount: $2,500… money you could have used to buy more masks.   

There’s a new age for taking RMDs, brought on by The SECURE Act, which I’ve covered in a couple of previous posts.  See The Game Changer and this overview.  Those two posts should bring you up to speed for most issues.

By the way, if an IRA was inherited in 2020, including a Roth IRA, an RMD must be taken for 2021 if the beneficiary is an eligible designated beneficiary is taking distribution over his/her life expectancy.  There are rules and exceptions, so be sure to get professional guidance.  IRAs inherited in 2021 and forward come under the 10-year rule, covered in the above previous posts.

RMD penalties are high and requesting waivers can result in headaches.  It’s best to do it right instead of having to do it over.

Jim

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Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  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.

Fotilla Images

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.