Debra T. Little, ChFC | Posted on Aug 01, 2016
Did you know it has become increasingly common for individuals who retire or change employers to take their retirement funds with them? Transferring 401(k) or other funds from an employer’s qualified plan to an Individual Retirement Account (IRA) allows greater flexibility in investing through individual or professional investment management. In addition, a direct transfer or rollover from the qualified plan to a traditional IRA does not subject the owner to early distribution penalties and preserves the deferred-tax status of the funds; funds are simply moved from the qualified plan to a traditional IRA. The funds continue to grow tax deferred until the owner reaches age 70 ½ and is required to begin taking taxable withdrawals.
The Required Minimum Distribution (RMD) rule forces IRA owners to begin a withdrawal process based on life expectancy charts. RMD rules and formulas were designed to deplete and tax the entire amount in an IRA over a specific time period. If an individual has multiple IRAs with various institutions, the rules stipulate the minimum amount that must be taken from each account. The total amount may be taken from any one or a combination of IRAs. Failure to comply with RMD requirements incurs one of the stiffest penalties imposed by the IRS --- 50% of the required distribution amount not taken!
The RMD rules continue even after the account owner dies. If there are funds remaining in the account, they must be distributed according to the IRA Beneficiary Designation form that is part of the account opening documentation. The distribution rules vary according to whether the beneficiary is a spouse or non-spouse and if the account owner was taking required minimum distributions. By transferring inherited funds into an inherited IRA or a spousal IRA, the beneficiary is able to spread the tax liability over his or her life expectancy and name his or her own beneficiary.
Whether an IRA owner is mid-career aged or of retirement age, it is important to match the types of investments used in an IRA with the goals of the owner and the comfort level relative to risk. The IRA portfolio should then be reevaluated on a regular basis to be certain the investment mix is appropriate and on target. Working with an investment manager is vital in establishing a well-designed investment strategy to assist in achieving that goal.
While the rules governing IRA distributions at death can be complicated, they do allow for estate planning opportunities. It is important to consult with your legal and/or tax advisor to be certain your IRA beneficiary designation(s) complements your estate plan. Equally important is pairing your investment goals with the proper management of your funds to obtain the desired outcome.
Given the IRA regulations and investment management can be an overwhelming process, it is best to consult with a professional to ensure any complexities are understood and don’t impact your future financial plans.