I don’t know how many pages in the IRS code are devoted to rules about retirement plans or even just IRAs, but I’ll bet most of us would consider it a two-person job to lift them up!
Even though I work every day with retirement plans, I find there are always some “experts” and most investors who are not aware of some of the finer points of IRS regulations.
Here are some interesting “knowledge nuggets” that might be helpful.
There are some tricky rules for beneficiaries. Let’s take for example, Dick who is 68 and Jane who is 58. Dick succumbs after having been on the receiving end of a falling meteorite.
Jane, who is not exactly a retirement expert, follows the advice of her adviser and rolls Dick’s IRA into one for herself.
The ability to rollover the entire IRA of the deceased spouse, into their own is only available for spouses.
Others must use a beneficiary IRA.
Now, since the funds are in her IRA, if she needs to take a distribution, she will pay a 10% penalty on top of the normal income tax because she is under 59½, regardless of her spouse’s age of 68.
Once a spousal beneficiary rolls over to their own IRA, the IRS regards the funds as having always been there so that now penalties on withdrawals are based on the survivor IRA owner’s age not the decedent.
The good part is that the RMD (required minimum distribution) requirements are now based on the survivor’s age and in this case, disappear until she is 70½.
The withdrawal penalty surprise can be eliminated by the beneficiary spouse rolling over the decedents account into a beneficiary IRA. The title could read Dick (deceased 6/30/17) IRA FBO Jane.
This way she could avoid the withdrawal penalty as it is still technically Dick’s IRA and she can avoid RMDs until Dick would have been 70½.
For beneficiaries under 59½, the best all-around solution is the beneficiary IRA. After reaching 59½ then a spousal rollover can be initiated to avoid the RMD required for the decedent.
If Jane dies while she has a beneficiary IRA and has named her children as beneficiaries, there are two possible scenarios.
• Because she is a spouse, the children could inherit and use a beneficiary IRA beginning RMDs based on their own ages (Stretch IRA, which is a marketing term used to describe an IRA that is set up to extend the period of tax-deferred earnings beyond the lifetime of the individual who created the account. The accounts are typically designed to last over multiple generations.)
If her death had occurred after Dick was 70½, the stretch provision would be lost. Thus another reason to switch to her own IRA before Dick’s 70½ birthday.
Let’s take a look at another hypothetical case.
Dick is either very persuasive or very wealthy, and at 71 married the much younger Jane who is 41. Dick is struck by lightning and passes away. Jane as beneficiary could choose a beneficiary account that would produce the following results:
1. She could take penalty-free distributions until she reached 59½.
2. She would be required to take RMDs.
3. Her beneficiaries could not use the stretch provision and RMDs would begin immediately upon rollover based on Jane’s age.
If Jane chose a spousal rollover to her own IRA she would expect:
1. All distributions prior to her age of 59½ would be subject to the 10% penalty.
2. She could delay distributions until she reached 70½.
3. Her choice would allow beneficiaries to use their own age to make RMDs (stretch IRA).
Here is an example of some good to know retirement account rules that are not common knowledge.
Let’s suppose that you choose to work past normal retirement age and have a 401K at work. If the plan has a still-working provision, the RMDs would not be required until separation from service.
Let’s say you now change jobs and wish to rollover into the new 401K. Even if the new 401K has a still-working provision, you must take one year’s RMD, and then you can forgo future RMDs while employed.
If you retire or separate and rollover to an IRA, then later decide to become self-employed (have earned income) you might consider rolling over your IRA into a simplified employee pension, SEP, so that you can continue to make contributions while still taking RMDs as long as you continue to work.
Rules pertaining to retirement accounts are really complicated such that I find myself reading the paragraphs several times to make sure I’ve “got it.”
The lesson here is to make sure you get advice from someone who knows the rules, not just the talk. Mistakes can be very costly.
There has been lots of news and events, much of which you might have expected to affect stocks. Well, so much for that theory. It’s a perfect example of one of Bob Farrell’s rules. The market makes the news. The news does not make the market.
The situation of low supply (selling pressure) and lackluster demand continues.
The bias is still upward and there are no signs of a significant top.
Questions may be answered by contacting Don Hutchinson, of Milford, at 203-301-0133. Safe Harbor Financial Management Securities offered through LPL Financial, member FINRA/SIPC. The opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial adviser before investing. Investing involves risks including the loss of principal. No strategy assures success or protects against loss.