1/25/2013 3:00 PM ET|
The $180,000 mistake in your IRA
If you want to turn your retirement savings into a family legacy, avoid these 3 common mistakes that could cost you big.
Americans have trillions of dollars locked away in traditional individual retirement accounts and 401k's. It should come as no surprise, then, that the largest asset you own might just be your retirement account. But your inheritance plans for those retirement savings could contain huge and expensive mistakes that may cost your family hundreds of thousands of dollars.
The main culprit? A poorly planned distribution strategy. You could have the best investment approach ever designed, but improper or incomplete estate planning could mean that your intended beneficiaries never get, or get only a small portion of, what you've saved.
If you've accumulated a significant amount of wealth in your tax-deferred retirement accounts, here are three critical mistakes to avoid in setting up your IRA or 401k as a lasting legacy.
No. 1: Imprudent investment strategies
One of the most common investment mistakes is taking an unhealthy level of risk with your retirement accounts. If you lose 50% of your savings because of a market crash, your legacy will not last as long as you had intended. Control risk with IRAs that have conservatively tilted investment strategies. Remember that the money you lose in an IRA is not tax deductible, unlike with other types of investment accounts.
No. 2: Incorrect custodial and trust documents
Dust off your IRA custodial document and double-check the fine print to verify whether your beneficiaries are barred from receiving your IRA inheritance as a lump sum. Here's why: If a non-spouse beneficiary, such as a child, chooses to receive your IRA as a lump sum, almost half of what you've saved could go to the government.
Say, for example, you have a $450,000 IRA, and your primary beneficiary is your child. The account would be subject to ordinary income taxes, which at current tax rates equal as much as 40% -- or $180,000 -- between federal and state taxes.
If you have a living trust, things get a little hairier because very few trusts are designed to avoid the tax bite on an IRA inheritance. But the good news is that under IRS publication 590, spouses have virtually unlimited options when they inherit an IRA, including taking lump-sum distributions.
No. 3: Incomplete information for all beneficiaries
Verify that you have primary and contingent beneficiaries listed on all of your retirement accounts. There is a difference between named beneficiaries and designated beneficiaries. It's not enough to list generic beneficiaries such as "my living spouse" as primary and "my living children" as contingent beneficiaries. You must specify the names, dates of birth, Social Security numbers, etc. of all your beneficiaries.
I once read that the average time it takes a beneficiary to cash out an inherited IRA is a whopping 93 days. By following the simple steps above, you may be able to shave a few days -- or weeks -- off that time when your family really needs it.
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IRA's are some of the most tax infested investments people own. I converted mine to a Roth in 2010 and took the tax hit distributed over 2 years, before the tax rates went up. Timing also worked out well (so far) since the market value went up about 40% after I made the conversion. That's a tax savings in the bag of about 13% of my original IRA value in two years.
Once in a blue moon, something actually goes right.
2. Non-spouses can put the money into an Inherited IRA and defer most of the tax except for required minimum distributions (around 4% of the account value annually). IRA distributions are subject to ordinary income tax which for most of us will be less when we are retired b/c we will have lower incomes overall. If the IRA goes to a trust, the trust will still pay taxes so that it won't count as income for the bene of the trust. Either way, govt will get taxes. Trust is really only necessary in very few instances. You'll be dead, do you care how they spend your money? Don't be a control freak.
3. Name your bene, but address and Socials are only necessary if your IRA company has to track down people. Long lost brother, estranged son, etc.
4. Call your IRA firm and ask.
They taught almost nothing about economics when I went to school.Almost nothing
in college.I`ve cracked a lot of books on the subject and make almost as much on
my investments asI do in my business.When I hear idiots say the market is fixed or
only goes up because the Fed `sQE3, well, I know they`re an idiot.
MSN has outdone itself. "Imprudent Investment Strategies". Duh!
Before MSN figures it out, I'll quote (more or less) Will Rogers who opined on investing in the stock market.
"Buy a stock. If it goes up, then sell it. If it doesn't go up, then don't buy it."
Let's stipulate that we're all opposed to "imprudent investment strategies". So, MSN, which ones are those? Buying stocks that go down? Buying bonds that go down? Buying anything that goes down?
Wow! Rob Russell is a financial genius! Even more incredibly, he writes about investing rather than actually doing it! He must have made a heckuva fortune before sinking to MSN. We are so blessed that he enlightens the common man.
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