Middle Aged Man Dies Leaving Substantial IRA With No Beneficiary – What Happens Next?

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A client, “Susan,” contacted me recently to help settle the affairs of her recently deceased son, “Frank.” Frank owned a traditional IRA that has a fairly substantial balance. Unfortunately, Frank did not list a beneficiary for the account. Shelly is Frank’s only living heir. Frank was 57 when he died in 2018. What are Susan’s options with regard to Frank’s IRA?

Because Frank’s IRA had no identifiable beneficiary, by default the IRA is payable to his estate. And since Frank died before age 70½, a special 5-year rule applies to the distribution of his IRA. In general, the entire balance of Frank’s IRA must be distributed by December 31 of the year containing the fifth anniversary of Frank’s death. In this case, the entire balance of Frank’s IRA must be distributed by December 31, 2023.

An estate does not have a life expectancy, so distributions cannot be “stretched” beyond the 5 years. However, the entire account balance does not have to be taken in one distribution, it can be broken up over multiple years to reduce the taxes payable as long as the entire account balance is distributed before the end of the fifth year following the year of the account owner’s death.

(Now, had Frank died after April 1 following the year he attained the age of 70½, Susan would have been able to stretch distributions from Frank’s IRA to the estate over his remaining life expectancy, avoiding the special 5-year distribution rule.)

If the entire account balance is not withdrawn by the end of the fifth year following Frank’s death, then the IRS could impose a penalty equal to 50% of the balance remaining. The penalty could be waived by the IRS if it finds there was a reasonable basis for the error.

Failing to designate a beneficiary of an IRA (or other retirement account for that matter) is one of the costliest mistakes you can make. Two problems are created: First, because distributions cannot be “stretched” beyond 5 years, there is little tax-deferred growth that can be achieved in such a short period of time. Second, since distributions from the account must be accelerated, the larger distributions create larger income tax bills.

It always pays to double check beneficiary designations on your retirement accounts (and life insurance, too). I recommend at least annually. Make sure you have beneficiaries named on all of your accounts, and to make sure those beneficiary designations are up to date. Has a beneficiary died, or is there some other reason to replace a beneficiary? If so, update your beneficiary designations immediately.

Do you have an issue concerning distributions from a retirement account, or planning for distributions from a retirement account? If so, call me, I can help.

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April 1 Deadline to Receive first RMD Looms.

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For all of you out there who turned age 70½ in 2018, you must start receiving required minimum distributions (RMDs) from your traditional IRAs and employer sponsored plans [401(k), 403(b), etc.,] by April 1, 2019.

The April 1 deadline applies to all employer sponsored plans and traditional IRAs and IRA-type plans, such as SEPs, SIMPLEs, etc. The deadline does not apply to Roth IRAs.

The April 1 deadline only applies if you did not receive your initial RMD in 2018. In addition, the April 1 deadline only applies to the RMD for the first year (2018). For all subsequent years, beginning with 2019, RMDs must be received by December 31. If you turned 70½ in 2018, but did not receive the first RMD from your IRA or other employer sponsored plan accounts by December 31, 2018, then you must take the RMD for 2018 before April 1, 2019. You still must receive the RMD for 2019 by December 31, 2019. So you will have to take two distributions in 2019, one for 2018 by April 1, and the second for 2019 before December 31.

Even though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, those who are still employed may (if the plan allows) delay taking RMD distributions from their workplace plans until April 1 of the year after the year they retire. Still-working employees cannot, however, delay taking RMD from traditional IRAs beyond April 1 after the year they turn age 70½ . This “still-working” exception only applies to workplace plans that permit a delay.

There is less than 1 month to the April 1 deadline. It is important to remember that the distribution must be received by April 1. It isn’t good enough to request the distribution from your IRA custodian. If it isn’t received by April 1, you will still be taxed on the amount of the first year RMD that should have been received, and the IRS will impose a penalty equal to 50% of that RMD. Ouch!

If you are faced with the April 1, deadline to receive your first RMD, and are not sure how much you are required to take or how to do it, give me a call, I can help.

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Frozen Pension Benefit – Do You Take the Lump Sum?

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It’s a difficult question without an easy answer. For many, income security in retirement depends upon getting the answer right.

Employers have been fazing out pension programs for many years now, replacing them with 401(k) and similar employee-contribution type plans. Many of these fazed out pensions were frozen, leaving participant employees eligible to receive at least some benefit from the pension plan. For those who are entitled to a benefit from a frozen pension plan, many have the option to receive an up-front lump sum payment of their accrued pension benefit in lieu of a lifetime monthly annuity payment.

Faced with that option, do you take the money, or settle for the lifetime annuity? The knee-jerk reaction of many is to take the lump sum. I’ve seen lump sum offerings in the six-figures, a pretty significant chunk of change. But even then it’s not an easy question to answer, especially for those who have limited savings or other income resources beyond Social Security. Will that lump sum be enough to see you through for the rest of your life?

When you retire, a primary goal is to have sufficient income to cover living expenses for the rest of your life, regardless of how long you live, factoring in economic conditions such as inflation, and fluctuations in the financial markets. For married couples, that income must last for two lifetimes. To complicate things further, if you are like most people that I’ve work with, you will underestimate how long you will live in retirement. (Everyone faced with the lump sum payment question thinks they’re going to die in a car accident tomorrow so they want the money today.) But for a married couple in their middle sixties, it is reasonable to expect at least one spouse will live into their 90s. Living 3 decades in retirement is becoming commonplace.

If you elect the annuity, you (and even your spouse with certain elections) will get a check every month for the rest of your life, no matter how long you live. You bear no risk.

Suppose you decide to take the lump sum. You’ll receive a single payment from the pension plan regardless of how long you end up living. Now you have to invest that money to generate an income stream that will last the rest of your lifetime. How long will that be; and how confident are you the money will last that long? It depends upon many factors, but that risk is on you. And you don’t want to run out of money during retirement.

So what’s the answer – do you take the lump sum or settle for the annuity? Let’s look at some of the factors that can play into that decision:

If you (and your spouse if married) are in good health, and the security of a lifetime income stream is important to you, the annuity makes sense. If you are not comfortable handling your own investments, the annuity lets you leave investment decisions to the pension plan. If you are pessimistic about the economy, inflation, or other risk factors in the future, you can leave that risk with the pension plan choosing the annuity option.

The lump sum option may make sense if you (and your spouse if married) are older and in poor health. If you have sufficient savings and investments that the annuity would not be a needed source of lifetime income to make ends meet, then the lump sum may be the better choice. Also, if you are confident in your abilities to manage your investments to generate a good rate of return, and can prudently manage withdrawals from savings and investment over your retirement years, the lump sum may be appropriate.

In any event, if you are offered a lump sum payment as an option from a frozen pension plan, it is crucial to work with a competent advisor who can help you make a proper decision that meets your goals and objectives in light of your financial situation. Avoid an advisor who has a vested interest in your opting for the lump sum – like they want to manage and invest the money (for a fee).

If you are struggling with the lump sum vs. annuity question, give me a call, I can help.

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Retirement Savers Get a Boost – IRA Contribution Limits Increased for 2019.

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There is good news for those of you who are actively saving for retirement. The IRA contribution limit, presently $5,500 for 2018, will increase to $6,000 for 2019. If you are age 50 or older in 2019, you can add an additional $1,000 to your IRA, for a total contribution of $7,000 for 2019. The increase applies to both traditional and Roth IRAs. This increase applies to contributions for the 2019 tax year, not for contributions made in 2019 for the 2018 tax year.  Non-working spouses may also benefit by making contributions to their own IRAs to boost retirement savings.

The increase is the result of cost-of-living adjustments made recently by the IRS to retirement account limits. This increase is the first since 2013!

Don’t forget, other IRA eligibility rules still apply. You must have earned income to contribute to an IRA. Generally, earned income is income from employment. Investment income and Social Security income is excluded. Furthermore, there are income limits that will affect your ability to make a fully deductible contribution to a traditional IRA. Your income may be too high to contribute to a Roth IRA. Finally, you cannot make a contribution to a traditional IRA in 2019 if you will be age 70½ or older.

For those of you participating in an employer sponsored 401(k) or 403(b) plan, the limit for salary deferrals into those types of plans will go up to $19,000 in 2019 ($25,000 if you are age 50 or older).

You can see all of the COLA increases for retirement accounts and other retirement related items HERE.

Having trouble putting together a retirement plan, or looking for ways to boost retirement savings?  Give me a call, I can help.

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Year-End IRA Housekeeping

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The end of the year is fast approaching, and with it several important deadlines for IRA account owners and beneficiaries. In my experience helping clients address year-end IRA matters, the following are the most problematic areas:

Required Minimum Distribution (RMD) Deadline:

December 31 is the deadline for taking RMDs from an IRA for an account owner who reached age 70½ before 2018. The RMD has to be withdrawn from the account before January 1. The account owner cannot merely request a distribution before year end. RMDs not withdrawn from the account are assessed a 50% penalty, in addition to regular income taxes. If you haven’t taken all of your RMDs yet for 2018, make sure you take them in time to avoid the 50% penalty.

RMDs for a Deceased IRA Owner:

If an IRA owner died in 2018 before all of his RMDs were taken for the year, the remaining RMDs must be paid to the account beneficiary before the end of 2018. This is not a pro-rated amount. The RMDs are calculated for the full year. This can often times be overlooked especially if the IRA owner died late in the calendar year. Undistributed RMDs from a decedent’s IRA are subject to the 50% penalty on missed distributions.

RMDs for Inherited Traditional IRAs or Roth IRAs:

A non-spouse beneficiary of an inherited IRA can elect to take annual RMDs over their remaining life expectancy. If they do, the first RMD distribution must be taken before December 31 of the year following the year of the IRA owner’s death, and then each year thereafter over their remaining life expectancy. If you are the beneficiary of an inherited IRA, you too must take an RMD before the end of 2018 if the account owner died in 2017 or earlier. Undistributed RMDs from an inherited IRA are also subject to the 50% penalty on missed distributions. This applies to the beneficiaries of Roth IRA accounts too. While a Roth IRA owner does not have to take distributions from a Roth IRA at any time, beneficiaries are subject to the same RMD rules as beneficiaries of traditional IRAs. So don’t get caught thinking you don’t have to take distributions from an inherited Roth IRA. You do!

Splitting Inherited Traditional IRAs or Roth IRAs:

If there are multiple beneficiaries of a traditional or Roth IRA account whose owner died in 2017, the account must be split into separate accounts for each beneficiary before December 31 of 2018. This is to ensure that each beneficiary gets to use his own life expectancy in determining annual RMDs for his share of the account. If the account is not split and the RMD taken before the end of 2018, the life expectancy of the oldest beneficiary will be used to calculate the annual RMDs for all of the beneficiaries. This results in younger beneficiaries paying more income taxes each year on their distribution from the account.

No “Still Working” Exception for Older and Still Working IRA Owners:

There is no “still working” exception to the RMD rules for traditional IRA owners who are still employed beyond age 70½. While an owner of a 401(k) account may work beyond age 70½ and delay RMDs from his 401(k) account while his employment continues, that same employee must take RMDs from his traditional IRA if he reached age 70½ before 2018. This includes owners of SEP-IRAs and SIMPLE IRAs.

While not exhaustive, these are the most common areas where mistakes are made.  Even if you’ve taken your RMDs for 2018, it won’t hurt to go back and review your situation and your math to avoid any negative consequences from unrealized errors.

The rules governing required distributions from IRAs are extremely complex.  The penalties for making a mistake can be severe.  If you need help navigating the year-end complexities of managing IRA distributions, please contact me.  I can help.

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You Reached Age 70½ This Year, So When Must You Take Your First IRA Distribution?

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We are approaching the end of the year and for many of you, 2017 is the first year you must begin taking a required minimum distribution from your traditional IRAs. As you may already know, the Internal Revenue Service rules require you to take a minimum distribution (known as “RMD”) from a traditional IRA each year once you reach age 70½. An RMD must be taken for the year in which you reach age 70½. The IRS rules allow you to delay that first RMD from your IRA to no later than April 1 following the year in which you reach age 70½. Thereafter, your annual RMD must be taken from the IRA no later than December 31. Let’s take a look at how these rules work in practice:

A client contacted me today with questions about taking the first RMD from his IRA. In my client’s case, he turned 70 in January of this year (2017). So he also reached age 70½ in 2017 (July). Under the applicable IRS rules, he must take an RMD for 2017 because that is the year he attained the age of 70½. While the ordinary deadline for taking the RMD from his IRA is December 31, he has the option of waiting to take the 2017 RMD until no later than April 1, 2018. There is a catch to waiting: He’ll also have to take an RMD for 2018 (before December 31, 2018), so he’ll have to take two distributions in 2018, one for his 2017 RMD and the second for the 2018 RMD. Doing so will increase his taxable income for 2018 resulting in a higher tax bill. To avoid this, he’ll have to take his 2017 RMD no later than December 31, 2017.  Fortunately, he still has time to decide whether to wait until 2018 to take the distribution.

To calculate his RMD, my client, like most IRA owners, will refer to the IRS uniform life expectancy table. To calculate his first RMD, he must also use the balance in the IRA as of December 31, 2016. He’ll use that balance even if he elects to defer taking his 2017 RMD until 2018 (remember, the distribution is for 2017). He’ll use the balance in the IRA as of December 31, 2017, to calculate his RMD for 2018.

If he fails to take his first RMD from the IRA before April 1, 2018 (or any subsequent RMD by the applicable December 31 deadline), the IRS will impose a penalty equal to 50% of the amount of the RMD that he should have taken out from his IRA for the year. Note, the RMD is the minimum that must be withdrawn from the IRA for the year, you can withdraw more than the RMD if you so choose.

The rules governing distributions from an IRA other other retirement account are extremely complex. Always work with a competent advisor.  If you are struggling with questions regarding retirement account distributions, give me a call, I can help.

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Transferring Company Stock From a 401(k) to an IRA? Don’t Forget The NUA!

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So, you are newly retired and thinking about what to do with your employer sponsored 401(k) account.  The stock market has gone up quite a bit recently and you’re pleased with the value of your 401(k) (or other employer sponsored account) – especially the value of the company stock in your account. You may be thinking about transferring your 401(k) to an IRA for greater investment flexibility. Before you do, you may want to consider a nifty strategy to potentially save a bundle on income taxes.

The strategy involves the net unrealized appreciation (NUA) on the company stock in your 401(k). In a nutshell, NUA is the difference between the current market value of the company stock and the price originally paid for the stock (cost basis). This NUA may be eligible for favorable capital gains tax treatment when the company stock is sold.

If you roll over your 401(k) account, including the company stock, to an IRA, and then later take distributions from the IRA, the entire distribution (including any company stock) will be subject to income tax at your ordinary income tax rate. That rate could be as high as 39.6% just for federal income taxes depending upon your tax situation.

If, instead of transferring your account balance (including the company stock) to an IRA, you take a lump-sum distribution of the entire account balance, including the company stock (sometimes called an “in-kind” distribution), the distribution of the stock will be subject to income taxes, but you will only pay long term capital gains taxes (from 0% to 20%) on the NUA when the stock is sold (you’ll pay taxes at ordinary tax rates on the cost basis portion). If you are able to complete a tax-free rollover of the remainder of the distribution (less the company stock) to an IRA, the amount rolled over escapes income taxation. The NUA strategy will not work if the stock is liquidated inside the 401(k), or rolled over to an IRA.

In order to make the strategy work, you must take an in-kind distribution of the company stock from your company retirement account as part of a lump-sum distribution of the entire account balance.  The lump sum distribution must follow a “triggering event,” such as retirement or other separation from service, attainment of age 59½, death [yes, the beneficiary of an inherited 401(k) or other employer plan account can take advantage of NUA], or disability.  The entire balance of the account must be distributed – you can’t just take an in-kind distribution of the company stock.

For those with appreciated company stock in their 401(k) or other employer-sponsored account, taking advantage of the NUA rules can help save on income taxes when the stock is sold. But like any other income tax saving strategy, especially involving retirement plan distributions, it’s complicated, and it may not work in every situation. So, before you go ahead and transfer your 401(k) account with the company stock to an IRA, sit down and consult with a qualified professional who can help you determine whether the NUA strategy is right for you.

Think the NUA strategy may work for you? Give me a call, I can help.

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2017 Retirement Plan Contribution Limits

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It’s a new year and time to look at retirement plan contribution limits for 2017:

IRA and Roth IRA limits for 2017 did not change from 2016. The maximum an individual with earned income can contribute to a traditional or Roth IRA (or between the two) is $5,500. Individuals age 50 or older this year may contribute an additional $1,000.

Contribution limits for 401(k) and 403(b) plan participants likewise remain the same. The maximum a participant can contribute to a 401(k) and 403(b) plan or a Roth-type plan is $18,000. Participants who are at least 50 years of age in 2017 can elect to defer an additional $6,000, making a total contribution limit of $24,000.

SIMPLE-IRA contribution limits do not change for 2017. A SIMPLE participant may defer $12,500 of income for the year. Participants who are at least 50 years of age this year can defer an additional $3,000 into the plan for a total deferral of $15,500.

SEP-IRA contribution limits increase $1,000 to a maximum contribution of $54,000. This limit also applies to Keogh and other profit sharing plans. SEP IRA participants who are at least 50 years of age in 2017 cannot make a catch-up contribution.

The phase-out ranges for deductible IRA contributions, and the ability to make Roth IRA contributions changes slightly. If you are married filing jointly, the phase-out range to make a deductible IRA contribution is between $99,000 and $119,000. For single or head of household filers, the phase-out range for 2017 is $62,000 – $72,000. The phase-out range for those who are married but filing separately remains $0 – $10,000.

The income limits for making Roth IRA contributions increased slightly for 2017. For those who married filing jointly, the ability to make an eligible Roth IRA contribution phases out between $186,000 – $196,000 for 2017. For single or head of household filers, the phase-out range is between $118,000 – $133,000. Those who are married filing separate get a phase-out range of $0 – $10,000 (unchanged for 2017).

If you are struggling with your retirement planning, please contact me. I can help!

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Do You Know These Social Security Rules for Retirees?

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Social Security is the largest public benefits program in the United States, paying money to more than 59 million beneficiaries every year.  It’s also one of the most complicated.  So it helps to know how the system works. A good article at www.mysanantonio.com covers 5 rules about Social Security retirement benefits every retiree should know:

How to Qualify. You must have 40 retirement credits, which equals 10 years of employment, to qualify for retirement benefits. The years spent working do not have to be consecutive, but a failure to earn the 40 credits will keep you from collecting. Even if you were out of the workforce for a while, you may still qualify for benefits.

When to Claim. You may begin taking your retirement benefits between the ages of 62 and 70, but the age you may receive a full retirement benefit will vary between age 66 and 67 (full retirement age), depending on your birth date. Your monthly benefit will be less if you elect to begin taking it before your full retirement age.  Your monthly benefit will increase every year that you delay claiming beyond full retirement age.

Working During Retirement. Social Security will be the main source of income for many retirees, but it may not be enough to cover all of one’s monthly living expenses. For many retirees, working at least part-time in retirement is a necessity. If you take your benefits before full retirement age, but still work, you may face a reduction in your monthly benefit if you earn more than the applicable income limits. Once you reach full retirement age, you can earn as much as you like without a corresponding benefit reduction.

Benefit Maximum. The most a person can receive monthly in Social Security benefits this year is approximately $3,500, but only if the recipient qualified for the maximum benefit at full retirement age and then waited until age 70 to begin collecting.

Benefits Are Taxable. Depending upon your combined income from all sources, up to 85% of your Social Security benefits may be subject to income tax. And it doesn’t take a lot of income to get to that point.

If you are nearing retirement age and thinking about applying for your Social Security benefits, or are already receiving them, this article contains good information you need to know. Click this link to read the entire article.