Best planning tips for IRAs, 401(k)s, and other retirement plans

Here are three tips I picked up at a talk by Natalie B. Choate, a Boston lawyer and author who is nationally renowned for her expertise in retirement benefits. She addressed a packed house of financial professionals at the Financial “Four”um in Pittsburgh a few months ago.

Many of her tips were quite sophisticated or applied in rare circumstances only, so I’m including only those that apply to a wide array of retirees. These tips are aimed at qualified retirement plans such as individual retirement accounts, 401(k)s, 403(b)s, and similar plans, which have rules different from “defined benefits” pension plans.

“If you do these three things,” Ms. Choate said, “you will be 95% of the way toward happy IRA ownership.”

Take your RMDs

Starting at age 70½, most plan owners need to start taking a required minimum distribution (RMD) each year. The RMD is an amount taken from a plan based on your life expectancy and the total amount you hold in all your plans. You need to request a distribution, which is then paid to you out of your plan and is taxable.

You can defer your first year distribution until April 15 of the next year. As Ms. Choate pointed out, deferral may make sense unless it puts you in a higher tax bracket.

The penalty for not taking your distribution on time is severe: an additional tax equal to 50% of the amount you should have taken.

So you really need to take your proper RMD each year.

Fill out your beneficiary form

One of the most valuable wealth-preserving features of IRAs and similar plans is the ability of your beneficiary to stretch distributions over many years (or in the case of a surviving spouse, the ability to roll it over and make it their own).

But your beneficiaries will have these abilities only if you do one thing: put your beneficiaries’ names on your beneficiary form.

Sounds simple, and it is, but it mustn’t be neglected. Without named beneficiaries, the retirement plan administrator may require your funds to go to your estate. In that case, all funds must be paid out in five years and your beneficiaries’ wealth-preserving advantages will be lost.

Be careful with rollovers and transfers

IRS rules allow you to transfer or roll over your funds from one plan to another, such as rolling over your 401(k) funds into your own IRA when you retire.

However, you must take care to follow some strict rules.

For example, if you retire and ask for a lump sum distribution of your 401(k) plan, you have 60 days to roll it over into an IRA. If you accomplish that within the 60 days, you keep all the many tax and savings advantages that come with these retirement plans. If you miss the deadline, those advantages are lost and you will have to pay tax on your whole lump sum distribution. (A better alternative in this example is to roll over your 401(k) to an IRA with a direct “trustee-to-trustee” transfer, meaning the funds go from one bank to another without being paid to you in the interim.)

Bad things happen with rollovers and transfer, Ms. Choate reminds us, so make sure you follow the rules to the letter.

Ms. Choate’s book, Life and Death Planning for Retirement Benefits, is widely considered the “Bible” of retirement plan law. It is available for order online at http://www.ataxplan.com/.

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