They should not be left ill-informed or unaware.
Talking about “the end” is not the easiest thing to do, and this is one reason why some people never adequately plan for the transfer of their wealth. Those who do create estate plans with help from financial and legal professionals sometimes leave their heirs out of the conversation.
Have you let your loved ones know a little about your estate plan? This is decidedly a matter of personal preference: you may want to share a great deal of information with them, or you may want to keep most of the details to yourself. Either way, they should know some basics.
Having this talk can become easier when it is a values conversation, not a money conversation.
Values driven estate planning. You can let your heirs know that your values are at the core of the decisions you have made. You need not tell them how much they will inherit. You may let them know about the planning steps you have taken to make a difficult time a bit easier.
For example, you can tell your loved ones that you have a will and/or a revocable living trust. In all probability, your executor or successor trustee has been informed of his or her future responsibilities – but other heirs may not know who the executor or successor trustee will be.
You can tell them that you have an advance health care directive in place and inform them who you have named as an agent to make health care decisions on your behalf if you cannot do so. You can provide the contact information for your estate planner, your CPA, your retirement planner, and any insurance, legal, and medical professionals you consult. Have your heirs ever met these people? Tell your heirs the role they have played for you, your family, or your company and why the judgment of these professionals should be trusted.
Do people beyond your household need to know any of this? Think about it for a second. If you have grandchildren, nieces, or nephews, do they figure into your estate plan? Is it appropriate to let them know that you have made an estate-planning decision or two on their behalf? How about charities or non-profits you have supported – have you notified them of your intent to make a gift from your estate and could knowledge of your decision better facilitate the process? How about your business partner(s)? Do they need to be informed of particular estate-planning intentions you have?
Obviously, you must keep certain details close to the vest. Keeping everything to yourself, however, can be problematic. Are your heirs aware of the location of a copy of your health care proxy? Might they discover that you have planned for some of your estate to transfer to charity only after your death? Dilemmas and surprises like these may be avoided through communication – the type of communication that anyone planning an estate should make a priority.
Not every couple or individual does, though. BMO Wealth Management asked the high net worth clients it advises if they had disclosed the location of their wills and power of attorney forms with their heirs. Thirteen percent of respondents said their heirs had no clue; 25% said “only my spouse and I” knew the location of the documents.1
A 2017 Caring.com poll determined that just 42% of Americans had gone so far as to draw up a will, let alone an estate plan. So, if you have planned for the transfer of your wealth, you are ahead of many of your peers. Just see that your intentions, and some specific details, are effectively communicated.1
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - cnbc.com/2017/11/15/12-financial-planning-documents-to-handle-health-end-of-life-care.html [11/15/17]
Deficient coverage may cost you someday.
Many households and businesses are insufficiently insured. The problem is not necessarily the quality of coverage, but the breadth and depth of it. Your own business or household may be more vulnerable than you realize.
Too many people go without disability insurance. If you work in a physically demanding field, your employer may provide short-term disability coverage – but many companies do not. According to the Bureau of Labor Statistics, just 39% of workplaces offer employees short-term coverage, and only 33% offer long-term coverage.1
If you are disabled and cannot work, your income soon disappears. Short-term disability insurance, which may last anywhere from 10-26 weeks, commonly replaces around 60% of it. Not ideal, but better than 0%. About 8% of the time, however, a short-term disability lasts more than six months and extends into a long-term disability. Long-term disability coverage can replace 50-70% of your salary for a period of 2-10 years, perhaps even until you turn 65.1,2
More people ought to have earthquake and flood coverage. You may think that earthquake insurance is only for those living right on top of fault lines. If your home sustains quake damage that you must repair with tens of thousands of dollars of your hard-earned money, or if your business is forced to close for two weeks after a major quake hits your area, your opinion will change.
Recent hurricanes and flood surges have underlined the value of flood insurance for those living in low-lying areas. Just 12% of U.S. homeowners have this coverage. A typical homeowner policy will cover minor water damage, but not flood damage.3
If you finance a car and it is stolen or totaled, will you have to pay for it? Not if you have GAP (Guaranteed Auto Protection) insurance. If you are going to finance a car, SUV, or truck, ask about this coverage – especially if you intend to use that vehicle for work or business. The coverage is cheap – payments are usually $10-15 more each month (over the life of the loan).4
If you buy a new truck for $25,000 and it is totaled a year later, the insurer providing GAP coverage will determine the current value of the vehicle and write a check for that amount minus your deductible. You may want GAP coverage if you are buying a vehicle with less than 30% down. Without it, you may risk owing more than the current market value of your vehicle if it is stolen or wrecked.4
Is your sewer line insured? Cities usually require homeowners to maintain the sewer lateral running onto their property – the “branch” of the main sewer system on the street that connects to their house. If that sewer lateral backs up, it could cost you thousands and create a health problem for your neighbors. (Businesses have the same responsibility.) Tree roots and even improper disposal of paper products and grease can lead to this problem. Coverage against it is relatively cheap – it just adds about $40-50 to the annual premium on a homeowner policy.5
Address the weaknesses in your personal or business coverage, today. You certainly do not want to look back with regret on “what you should have done.” Be prepared, and put coverage for some or all of these potential crises in place.
1 - time.com/money/4428179/short-term-disability-pay/ [6/19/17]
2 - thebalance.com/what-is-long-term-disability-insurance-1918178 [7/9/17]
3 - cnbc.com/2017/09/11/navigating-insurance-claims-post-hurricane-irma.html [9/11/17]
4 - chron.com/cars/article/Financing-a-car-GAP-insurance-can-keep-drivers-12200736.php [9/15/17]
5 - wnins.com/resources/personal/features/sewerbackup.shtml [9/15/17]
Wise money moves for parents under 40.
As you start a family, you start to think about certain financial matters. Before you became a mom or dad, you may not have thought about them much, but so much changes when you have kids.
Parenting presents you with definite, sudden, financial needs to address. By focusing on those needs today, you may give yourself a head start on meeting some crucial family financial objectives tomorrow. The to-do list should include:
Life & disability insurance coverage. If one or both of you cannot work and earn income, your household could struggle to meet education expenses, medical expenses, or even paying the bills. Disability insurance payments could provide some financial support in such an instance. Some employers provide it, but that coverage often proves insufficient. Every fifth American has a disability, and more than 25% of 20-year-old Americans will become disabled before reaching retirement age. One in eight working people will be disabled for five years or longer during their pre-retirement years. Could you imagine your household going that long on only a fraction of its current income?1,2
Generally, the earlier you buy life insurance coverage, the cheaper the premiums will be. The biggest savings await those consumers who buy coverage before age 30 and before they marry and have kids. After 30, high blood pressure and cholesterol problems may begin to show up on blood tests, and other health problems may surface. As an example, a single, child-free 25-year-old in good health purchasing a 30-year term policy with a $500,000 death benefit will pay a monthly premium of about $75. The premium jumps to around $115 for the typical 35-year-old married parent in good health.3
Estate planning. Is it too early in life to think about this? No. Life insurance, a will, a living trust – these are smart moves, especially if you have children with any kind of special needs or health concerns of your own that may shorten your longevity or lead to weaknesses in body or mind. Besides documents linked to insurance and wealth transfer, consider a durable power of attorney and a health care proxy.
If you are considering designating a guardian for your children in the event of the unthinkable, whoever you appoint needs to be comfortable with the possibility of taking legal responsibility for your child. That person must also have the financial wherewithal to be a good guardian, and his or her family or spouse must also be amenable to it.
College planning. What will a year at a public university cost in 2035? Vanguard, the investment company, conducted an analysis and projected an average tuition of $54,070. (The 2035 projection was $121,078 for a private college.) So, the message is clear: start saving now. Saving and investing for college through a 529 plan, a Coverdell ESA, or other accounts that offer the potential for tax-deferred growth may give you a better chance to meet those future costs.4
An emergency fund. Ideally, your household maintains a cash cushion equivalent to 3-6 months of salary. Build it a little at a time, set aside a bit of money per month, and you may be surprised at how large it grows during the coming years.
Address these priorities now, and you may lower your chance of financial stress in the future.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - ssa.gov/disabilityfacts/facts.html [8/10/17]
2 - blog.disabilitycanhappen.org/life-insurance-vs-disability-insurance/ [7/14/17]
3 - moneyunder30.com/buying-life-insurance-young-saves-money [1/5/17]
4 - teenvogue.com/story/college-tuition-cost-future [3/18/17]
Basic estate planning documents may not communicate your intentions.
There are three degrees of estate planning: advanced, basic, and none at all. Basic is better than none, but elementary estate planning can still leave something to be desired. While appropriate documents may be in place, they may not be able to fully convey what you really want to do with your estate.
Have you communicated your wishes to your heirs, in writing? Cut-and-dried, boilerplate legal forms will hardly do this for you.
In a wealth transfer strategy (as opposed to a basic, generic estate plan), you share your values and goals in addition to your assets. You hand down your wealth with purpose, noting to your beneficiaries and heirs what should be done with it. You also let them know how long the transfer of assets may take. This way, expectations are set, and you reduce the risk of your beneficiaries and heirs being unpleasantly surprised.
Are your heirs prepared to inherit your wealth? Prepare them as best you can during your lifetime. Introduce them to the financial, tax, and insurance professionals who have helped you through the years; they should know how to contact these professionals, and they should value their wisdom.
Explain the “why” of your estate planning decisions. For example, if you intend to transfer assets to heirs or charity through a living trust, a charitable remainder trust, or a qualified charitable distribution from an IRA, share the logic behind the move.
Also, let your heirs know that your wealth transfer strategy is dynamic. It can change. Five or ten years from now, you may have more or less wealth than you currently do, and life events may come along and prompt changes to your estate planning documents. Speaking of communication, this leads to a third, important aspect of a wealth transfer strategy.
Have you double-checked things? Look at your beneficiary forms and other estate planning documents. Are they up to date?
When a beneficiary form is out of date, it can invite problems – because legally, the instructions on a beneficiary form can overrule a will bequest. What if the named beneficiary is dead, and the contingent beneficiary is dead as well? What if your named beneficiary is estranged or divorced from you? In such instances, the asset may not transfer to whom you wish after you pass away. Looking at the wealth transfer process from another angle, you also want to make sure you have an executor who is of sound mind and who has the potential to remain lucid and reasonably healthy for years to come.1
A basic estate plan is better than procrastination. A bona fide wealth transfer strategy is even better. Involving your heirs in its creation, refinement, and implementation may help you guide your wealth into the future in accordance with your goals.
1 - thebalance.com/why-beneficiary-designations-override-your-will-2388824 [8/28/17]
You may assume you will. That assumption could be a retirement planning risk.
How long do you think you will work? Are you one of those baby boomers (or Gen Xers) who believes he or she can work past 65?
Some pre-retirees are basing their entire retirement transition on that belief, and that could be financially perilous.
In a new survey on retirement age, the gap between perception and reality stands out. The Employee Benefit Research Institute (EBRI) recently published its 2017 Retirement Confidence Survey, and the big takeaway from all the data is that most American workers (75%) believe they will be on the job at or after age 65. That belief conflicts with fact, for only 23% of retired workers EBRI polled this year said that they had stayed on the job until they were 65 or older.1
So, what are today’s pre-retirees to believe? Will they upend all their assumptions about retiring? Will working until 70 become the new normal? Or will their retirement transitions happen as many do today, arriving earlier and more abruptly than anticipated?
Perhaps this generation can work longer. AARP, for one, predicts that nearly a quarter of Americans 70-74 years old will be working in 2022, including nearly 40% of women that age by 2024. That would still leave many Americans retiring in their sixties – and more to the point, working until 70 is not a retirement plan.2
What if you retire at 63, two years before you can enroll in Medicare? EBRI’s statistics indicate that this predicament has been common. You can pay for up to 18 months of COBRA (which is not cheap), tap a Health Savings Account (if you have one), or take advantage of your spouse’s employer-sponsored health coverage (if your spouse still works and has some). Beyond those options, you could either pay (greatly) for private health insurance or go uninsured.3
What if you end up claiming Social Security earlier than planned? Given an average lifespan (i.e., you live into your eighties), that may not be so bad – you will get smaller monthly Social Security payments if you claim at 63 rather than at the Full Retirement Age (FRA) of 67, but the total amount of retirement benefits you receive over your lifetime should be about the same. Retiring and claiming Social Security well before Full Retirement Age (FRA), however, may mean a drastic revision of your retirement income strategy, if not your whole retirement plan.4
What will happen to your retirement assets if you leave work early? Will you still be able to contribute to your IRA(s) or pay the premiums on a cash value life insurance policy? Could you postpone withdrawals from your retirement accounts for months or years? How long can you count on this bull market?
If you are a baby boomer or Gen Xer, hopefully you have planned or built wealth to such a degree that the shock of an early retirement will not derail your retirement plan. It is realistic to recognize that it could.
If you want to work past 65, one key may be keeping your job skills current. The Transamerica Center for Retirement Studies reports that only about 40% of baby boomers are doing that.1
Lastly, if you switch jobs, you may improve your odds to work longer. A new study from the Center for Retirement Research at Boston College notes that 55% of college-educated workers who voluntarily changed jobs in their fifties were still working at age 65, compared with only 45% of workers who stayed at the same employer.1
1 - cnbc.com/2017/04/21/the-dangers-of-planning-on-working-longer.html [4/21/17]
2 - aarp.org/politics-society/history/info-2016/baby-boomers-turning-70.html [1/16]
3 - forbes.com/sites/financialfinesse/2017/02/09/how-to-cover-medical-expenses-if-you-retire-before-65/ [2/9/17]
4 - fool.com/retirement/2017/03/04/the-one-social-security-mistake-you-dont-want-to-m.aspx [3/4/17]
You could save today & tomorrow, often without that penny-pinching feeling.
Directly & indirectly, you might be able to save more per month than you think. Hidden paths to greater savings can be found at home and at work, and their potential might surprise you.
Little everyday things may be costing you dollars you could keep. Simply paying cash instead of using a credit card could save you four figures annually. An average U.S. household carries $9,000 in revolving debt; as credit cards currently have a 13% average annual interest rate, that average household pays more than $1,000 in finance charges a year.1
The typical bank customer makes four $60 withdrawals from ATMs a month – given that two or three are probably away from the host bank, that means $5-12 a month lost to ATM fees, or about $60-100 a year. A common household gets about 15 hard-copy bills a month and spends roughly $80 a year on stamps to mail them – why not pay bills online? Automating payments also rescues you from late fees.1
A household that runs full loads in washing machines and dishwashers, washes cars primarily with water from a bucket, and turns off the tap while shaving or brushing teeth may save $100 (or more) in annual water costs.1
Then, there are the big things you could do. If you are saving and investing for the future in a regular, taxable brokerage account, that account has a drawback: you must pay taxes on your investment income in the year it is received. So, you are really losing X% of your return to the tax man (the percentage will reflect your income tax rate).2
In traditional IRAs and many workplace retirement plans, you save for retirement using pre-tax dollars. None of the dollars you invest in those plans count in your taxable income, and the invested assets can grow and compound in the account without being taxed. This year and in years to follow, this means significant tax savings for you. The earnings of these accounts are only taxed when withdrawn.2,3
How would you like to save hundreds of dollars per month in retirement? By saving and investing for retirement using a Roth IRA, that is essentially the potential you give yourself. Roth IRAs are the inverse of traditional IRAs: the dollars you direct into them are not tax deductible, but the withdrawals are tax free in retirement (assuming you abide by I.R.S. rules). Imagine being able to receive retirement income for 20 or 30 years without paying a penny of federal income taxes on it in the years you receive it. Now imagine how sizable that income stream might be after decades of compounding and equity investment for that IRA.4
Many of us can find more money to save, today & tomorrow. Sometimes the saving possibilities are right in front of us. Other times, they may come to us in the future because of present-day financial decisions. We can potentially realize some savings by changes in our financial behavior or our choice of investing vehicles, without resorting to austerity.
1 - realsimple.com/work-life/money/saving/money-saving-secrets [7/13/17]
2 - investopedia.com/articles/stocks/11/intro-tax-efficient-investing.asp [8/5/16]
3 - blog.turbotax.intuit.com/tax-deductions-and-credits-2/can-you-deduct-401k-savings-from-your-taxes-7169/ [2/7/17]
4 - cnbc.com/2017/05/15/personal-finance-expert-do-these-6-things-to-save-an-extra-700-per-month.html [5/15/17]
Today’s impulsive moves could breed tomorrow’s regret
When emotions and money intersect, the effects can be financially injurious. Emotions can cause us to overreact – or not act at all when we should.
Think of the investors who always respond to sudden Wall Street volatility. That emotional response may not be warranted, and they may come to regret it.
In a typical market year, Wall Street can see big waves of volatility. This year, it has been easy to forget that truth. During the first third of 2017, the S&P 500 saw only 3 trading days with a 1% or greater swing – or to put it another way, 1% swings occurred just 3.5% of the time. Compare that to 2015, when the S&P moved 1% or more in 29% of its trading sessions.1
The 1.80% May 17 drop of the S&P stirred up fear in some investors. The plunge felt earthshaking to some, given the placid climate on the Street this year. Daily retreats of this magnitude have been seen before, will be seen again, and should be taken in stride.2
Fear and anxiety can also cause stubbornness. Some people have looked at money one way all their lives. Others have always seen investing from one perspective. Then, something happens that does not mesh with their outlook or perspective. In the face of such an event, they refuse to change or admit that their opinion may be wrong. To lose faith in their entrenched point of view would make them feel uneasy or lost. So, they doggedly cling to that point of view and do things the same way as they always have, even though it no longer makes any sense for their financial present or future. In this case, emotion is simply overriding logic.
What about those who treat revolving debt nonchalantly? Some people treat a credit card purchase like a cash purchase – or worse yet, they adopt a psychology in which buying something with a credit card feels like they are “getting it for free.” A kind of euphoria can set in: they have that dining room set or that ATV in their possession now; they can deal with paying it off tomorrow. This blissful ignorance (or dismissal) of the real cost of borrowing can dig a household deeper and deeper into debt, to the point where drawing down savings may be the only way to wipe it out.
How about those who put off important financial decisions? Postponing a retirement or estate planning decision does not always reflect caution or contemplation. Sometimes, it reflects a lack of knowledge or confidence. Worry and fear are the emotions clouding the picture. What clears things up? What makes these decisions easier? Communication with professionals. When the investor or saver recognizes a lack of understanding, shares his or her need to know with a financial professional, and asks for assistance, certainty can replace ambiguity.
Emotions can keep people from doing the right things with their money – or lead them to keep doing the wrong things. As you save, invest, and plan for your future, try to let logic rule. Years from now, you may be thankful you did.
1 - nytimes.com/2017/05/09/upshot/the-stock-market-is-weirdly-calm-heres-a-theory-of-why.html [5/9/17]
2 - google.com/finance?q=INDEXSP:.INX&ei=6RMeWfG_JMO7euKQkagG [5/18/17]
Keep an eye on where it goes, as some destinations may be better than others.
You can probably envision how most of your retirement money will be spent. Much of it will be used on living expenses, health care expenses, and, perhaps, debt reduction. Beyond the basics, you will unquestionably reserve some of those dollars for grand adventures and great experiences. If your financial situation permits, you may also contribute to charity.
You just have to remember that your retirement fund is not a bottomless well. If outflows begin to exceed inflows (that is, you repeatedly withdraw more than you make back), you will face a serious financial problem.
With that hazard in mind, be wary of these four spending sieves. Some retirees fall prey to them, and all four can potentially reduce a retirement fund at an alarming rate.
Spending some of your retirement money on your adult children. According to the Federal Reserve Bank of New York, the average indebted college graduate is shouldering $34,000 in student loans. No wonder some millennials live without a car, live with a couple of roommates, or live with their parents. It is easy to feel empathy for a son or daughter in this situation, but you need not bail them out.1
You may be tempted to pay off some bills for an adult child, even some education debt – but should your retirement dollars be used for that? Frankly, no. (If you face the prospect of retiring with outstanding student loans, attack yours instead of ones linked to your kids.)
Spending some of your retirement money on your home. Should the mortgage be paid off? Does the landscaping need work? Should you put in solar panels? In asking such questions, question whether you want to assign your retirement dollars to such expenses.
Making a big lump-sum payment to erase your mortgage balance can also erase that money right out of your retirement savings. Some retirees find it better just to carry their home loans a little longer, enjoying the associated mortgage interest tax break. Certain home improvements might raise the value of your residence; others might not be cost effective.
Spending some of your retirement money at casinos. It is amazing how many retirees flock to gaming establishments. As AARP noted last year, about half of visitors to U.S. casinos are aged 50 or older. Gambling addiction is, fortunately, rare, but even casual gamblers can have a hard time walking away due to the comfort and conditions of the casino experience. Would any retiree be able to defend such spending as purposeful?2
Spending too much of your retirement money at the start of your “second act.” Often, retiree households get a little too ambitious with their travel plans or live it up just a little too much in the first few years of retirement. Either on their own or through a talk with their retirement planner, they learn that they must reduce their spending – and fast.
Aim to spend your retirement money in a way that you will not regret. Recognize these potential traps, strive to steer clear of them, and consider options that may give your retirement fund the possibility of further growth.
Citations.1 - tinyurl.com/ldkz9yt [4/4/17]2 - aarp.org/money/scams-fraud/info-2016/casino-traps-older-patrons.html [2/16]
They are low, unless you show the I.R.S. some conspicuous “red flags” on your return.
Fewer than 1% of Americans have their federal taxes audited. The percentage has declined recently due to Internal Revenue Service budget cuts. In 2016, just 0.7% of individual returns were audited (1 of every 143). That compares to 1.1% of individual returns in 2010.1,2
The rich are more likely to be audited – and so are the poor. After all, an audit of a wealthy taxpayer could result in a “big score” for the I.R.S., and the agency simply cannot dismiss returns from low-income taxpayers that claim implausibly large credits and deductions.
Data compiled by the non-profit Tax Foundation shows that in 2015, just 0.47% of Americans with income of $50,000-75,000 were audited. Only 0.49% of taxpayers who made between $75,000-100,000 faced I.R.S. reviews. The percentage rose to 8.42% for taxpayers who earned $1-5 million. People with incomes of $1-25,000 faced a 1.01% chance of an audit; for those who declared no income at all, the chance was 3.78%.2
What “red flags” could prompt the I.R.S. to scrutinize your return? Abnormally large deductions may give the I.R.S. pause. As an example, suppose that you earned $95,000 in 2016 while claiming a $14,000 charitable deduction. Forbes estimates that the average charitable deduction for such a taxpayer last year was $3,529.3
Sometimes, the type of deduction arouses suspicion. Taking the Earned Income Tax Credit (EITC) without a penny of adjusted gross income, for example. Or, claiming a business expense for a service or good that seems irrelevant to your line of work. A home office deduction may be ruled specious if the “office” amounts to a room in your house that serves other purposes. Incongruous 1099 income can also trigger a review – did a brokerage disclose a big capital gain on your investment account to the I.R.S. that you did not?4
Self-employment can increase your audit potential. In 2015, for example, taxpayers who filed a Schedule C listing business income of $25,000-100,000 had a 2.4% chance of being audited.2
Some taxpayers illegitimately deduct hobby expenses and try to report them on Schedule C as business losses. A few years of this can wave a red flag. Is there a profit motive or profit expectation central to the activity, or is it simply a pastime offering an occasional chance for financial gain?
If you are retired, does your audit risk drop? Not necessarily. You may not be a high earner, but there is still the possibility that you could erroneously claim deductions and credits. If you claim large medical expenses, that might draw extra attention from the I.R.S. – but if you have proper documentation to back up your claims, you can be confident about them.
The I.R.S. does watch Required Minimum Distributions (RMDs) closely. Failure to take an RMD will draw scrutiny. Retirees who neglect to withdraw required amounts from IRAs and employer-sponsored retirement plans can be subject to a penalty equal to 50% of the amount not withdrawn on time.1
The fastest way to invite an audit might be to file a paper return. TurboTax says that the error rate on hard copy returns is about 21%. For electronically filed returns, it falls to 0.5%. So, if you still drop your 1040 form off at the post office each year, you may want to try e-filing in the future.4
Citations.1 - kiplinger.com/slideshow/retirement/T056-S011-9-irs-audit-red-flags-for-retirees/index.html [3/17]2 - fool.com/retirement/2017/02/06/here-are-the-odds-of-an-irs-audit.aspx [2/6/17]3 - forbes.com/sites/baldwin/2017/01/23/tax-guide-deductions-and-audit-risk/ [1/23/17]4 - fool.com/retirement/2016/12/19/9-tax-audit-red-flags-for-the-irs.aspx [12/19/16]
Will it apply to your retirement savings distribution?
If you receive a distribution from your IRA or workplace retirement plan, what will you do with it? You will probably want to arrange an IRA rollover – a common and useful financial move designed to take these invested assets from one retirement account to another, without tax consequences. The I.R.S. may give you just 60 days to do it, however.
The clock starts ticking on the day you receive the distribution. If assets from your employee retirement plan account or your IRA are paid directly to you, you have 60 calendar days to transfer those funds into an IRA or workplace retirement plan. If you fail to do that, the I.R.S. will characterize the entire distribution as taxable income. (It may also tack on a 10% early withdrawal penalty if you take possession of such funds before age 59½.)1
Your goal is to make this indirect rollover by the deadline. It is called an indirect rollover because its mechanics can be a bit involved. If the assets are coming out of an employee retirement plan, your employer may withhold 20% of them in accordance with tax laws. Unfortunately, you do not have the option of depositing only 80% of the distribution into an IRA or another employee retirement plan – you must deposit 100% of it by the deadline. You have to come up with the remaining 20%, yourself, from your own savings. The withheld 20% should be returned to you at tax time if the rollover completes smoothly.2
Can you make multiple IRA rollovers using funds from a single IRA? You can, but the I.R.S. says the rollovers must occur at least 12 months apart. Additionally, the I.R.S. prohibits you from making a rollover out of the “new” IRA that receives the transferred assets for a year following that transfer.1
This 12-month limit does not apply to every kind of retirement plan rollover. Trustee-to-trustee transfers, where the investment company (acting as custodian of your IRA or retirement plan account) simply sends a check for the assets to the brokerage firm that will eventually receive them, are exempt from the 60-day deadline. So are rollovers between workplace retirement plans, IRA-to-plan rollovers, and plan-to-IRA rollovers. If you are converting a traditional IRA to a Roth IRA, the 60-day rule is also irrelevant.1,2
Some retirement savers simply opt for a trustee-to-trustee transfer – a direct rollover – rather than an indirect one. A direct rollover of retirement assets is routine, and it can be coordinated with the help of a financial professional. If you do prefer to perform an indirect rollover on your own, be mindful of the 60-day rule and the potential ramifications of missing the deadline.
Citations.1 - irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions [2/8/17]2 - fool.com/retirement/2017/03/08/what-to-do-with-your-old-401k-when-switching-jobs.aspx [3/8/17]