Article: Steering You Clear of These Top 10 IRA Mistakes

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Martin V. Higgins, of Family Wealth Management, has been serving the needs of affluent individuals and business owners since 1976. In 2002, Marty was inducted into Research Magazine’s Hall of Fame, which annually recognizes the top advisors in the USA. His continuous pursuit of education provides him the knowledge and skills necessary to allow him to effectively evaluate each client’s financial objectives and offer creative strategies and solutions to preserve and transfer family wealth.

 10.  Not taking advantage of increased contribution limits.  In 2002, IRA contribution limits increased for the first time in 20 years.  The contribution limit in 2006 is $4,000.  If you are an IRA owner age 50 or older, you can also make an additional $1,000 “catch-up” contribution.

9.  Assuming a nonworking spouse cannot contribute.  The truth is that separate “spousal” IRAs may be established for spouses with little or no income up to the same limits as the working spouse.

8.  Paying unnecessary penalties on early (pre-age 59^1/2) IRA distributions.  As long as withdrawals are made in accordance with the requirements of Section 72(t) calling for “a series of substantially equal periodic payments,” there is no need to pay penalties on distributions from IRAs before you are age 59^1/2.  Three calculation methods give IRA owners flexibility to take out the amount that is right for you.

7.  Not listing beneficiaries or not updating IRA beneficiaries.  One of the most common mistakes made by IRA owners is either not listing a beneficiary, which may result in distribution of the IRA assets to the IRA owner’s estate, or not updating the beneficiary designations and coordinating them with your other estate planning documents.

6.  Placing the title of an IRA into a trust.  Changing the actual ownership of the IRA to a trust causes immediate taxation—including the 10% penalty tax if you are an IRA holder under age 59^1/2.

5.  Missing important dates.  Estate taxes, if applicable, will be due nine months after the IRA owner’s death.  The same deadline applies to beneficiaries who wish to disclaim IRA assets.  By September 30 of the year following the year of the owner’s death, the beneficiary whose life expectancy will control the payout period must be determined.  And, generally, IRA beneficiaries must begin taking required distributions by December 31 of that same year to avoid IRS penalties.  It’s funny isn’t it?  We get nine months to come into this world and the IRS gives us nine months to leave it.

4.  Making inappropriate spousal rollovers.  Most IRAs list the owner’s spouse as the primary beneficiary, and one of the most popular strategies for a spousal beneficiary is to simply roll that IRA into the surviving spouse’s own IRA.  But it can be more tax efficient for a surviving spouse to leave the IRA in the owner’s name or disclaim the assets thereby allowing them to pass to the contingent beneficiary.

3.  Beneficiaries not taking advantage of IRD.  At death, IRAs are included in the IRA owner’s estate, creating an estate tax liability (if applicable) as well as an income tax liability for beneficiaries.  Many IRA beneficiaries don’t realize that IRAs are considered “Income with Respect to a Decedent” (IRD) according to Section 691(c) of the IRS code.  The IRD designation allows beneficiaries to take an income tax deduction for any estate taxes paid on the IRA’s assets, thus limiting double taxation of the IRA assets.

2.  Not taking advantage of the stretch distribution option or not establishing it properly.  The “Stretch IRA” is a way for nonspouse IRA beneficiaries to maximize payouts from the IRA over their entire life expectancy.  Properly designating beneficiaries and informing them of the IRA owner’s “stretch” intentions are keys to making this strategy work.

And the #1 IRA planning mistake…

1.  TAKING THE WRONG RMD.  New rules regarding required minimum distributions were finalized in 2002.  Many individuals may be taking too much out, but if you are not taking enough, you may be subject to a penalty tax of 50% of the amount not received as an RMD.

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