‚ÄúCan I protect my retirement savings from stock market unpredictability, nursing homes, creditors, etc., especially during retirement?‚ÄĚ
“Can I consolidate the different retirement accounts I have, and what are the tax implications?‚ÄĚ
‚ÄúCan I have guaranteed income for life and ensure generational wealth transfer of my assets?‚ÄĚ
‚ÄúCan I protect my retirement savings from stock market unpredictability, nursing homes, creditors, etc., especially during retirement?‚ÄĚGetty Images
These are just a few questions I‚Äôve heard over the past 30 years as a retirement professional. In order to answer them, I‚Äôve noticed seven common mistakes when it comes to finding added peace of mind about retirement and taxes:
1.¬†Not Knowing Your Options When You Retire or Change Jobs
When you retire, most retirement accounts (401(k), 403(b), TSP, SEP plans, etc.) can be transferred or rolled over into an IRA or another retirement plans. You can roll over or transfer 100% of it tax-free to Self-Directed Individual Retirement Arrangements (IRAs). The 60-day rule requires a rollover or transfer of a 401(k)/IRA to another qualified plan within 60 days. Otherwise, the entire amount is subject to tax.1 ¬†
Once you retire or change jobs, you may want to consider moving your money to a self-directed IRA or other retirement account, if possible. This can allow for access to more options as you map out your retirement journey.
2.¬†Not Knowing That Retirement Accounts Are 100% Taxable
Even in retirement, we can‚Äôt escape taxes: Qualified plans are tax-deferred, and/or the contributions could be tax deductible, as well. Distributions from IRAs and 401(k)s are taxed as ordinary income. When you withdraw funds from your qualified accounts before age 59¬Ĺ IRS can impose a 10% penalty, except in certain circumstances (such as Rule 72(t) or if a disability income stream applies).2
3.¬†Not Taking RMDs
Once you reach age 70¬Ĺ, you must start taking required minimum distributions (RMDs). If you fail to take your RMD each year, the IRS will impose a 50% penalty on the amount you should have taken. For example, if the RMD is $10,000, and you didn‚Äôt take it, you must take $15,000. $5,000 is the penalty for not taking $10,000, and taxes are paid on $15,000, not on $10,000.3
4.¬†Not Considering Permanent Life Insurance
I believe permanent life insurance is the best kept secret in retirement legacy planning. Permanent life insurance contracts allow you to accumulate wealth while alive and leave a death benefit that can pass to your loved ones tax-free if you are an American citizen.
5.¬†Not Knowing About Annuities and How They Can Fit into Retirement
Annuities have not had the best reputation over the years, but they can act as useful retirement vehicles if you understand and use them correctly.
Let‚Äôs look at this hypothetical example: You have $500,000 in savings and split it into two buckets of $250,000 each. One bucket is an immediate annuity, where you start income now for 10 years, and the other bucket is a TSA for 10 years with a potential 5-7% ROI. In 10 years, your $250,000 grows to $500,000. You split it again, start a new income stream, and invest the other $250,000. An FIA income rider can help achieve the growth potential and offer guaranteed income for life.
*This is a hypothetical example and not intended to imply any past or future performance. Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Michila Okolo-1
6. Unknowingly Disinheriting Your Spouse in an IRA Inheritance
Your 401(k)/IRA is your money, but some plans require spousal consent before taking a distribution. Whoever is listed as the beneficiary on the IRA Form will inherit the 401(k)/IRA.5 ¬†
Spouses have many options when inheriting a 401(k)/IRA, including a rollover or transfer to his/her own IRA. Converting to a Roth IRA and paying taxes now can allow the account to grow tax-free and no RMD later.
Keep in mind that, as of 2018, once you convert traditional IRA into Roth IRA, you can‚Äôt change your mind‚ÄĒRoth IRA re-characterizations have been eliminated.6
7.¬†Passing Assets to Children/Grandchildren with a Stretch IRA Strategy
A stretch IRA strategy is a unique estate planning strategy that can allow a non-spousal beneficiary to take advantage of the tax-deferral of an inherited IRA. This option can allow beneficiaries to not take the full distribution within five years of the death of the IRA owner. In turn, the beneficiary can take RMDs based on their own age or the original IRA owner‚Äôs age in their year of death, allowing remaining assets to grow tax-deferred, if structured correctly.
This strategy allows funds to be passed from one generation to another with a tax-deferred benefit. Let‚Äôs look at a hypothetical example: a $100,000 inherited IRA for a five-year-old beneficiary who has an estimated life expectancy of 77.7 years, according to current IRS life expectancy tables. If the IRA were to earn a 6% average annual rate of return, and the beneficiary lived to the projected life expectancy, or the beneficiary‚Äôs successor collected only the RMD annually, they could collect a cumulative lifetime income of over $2.1 million from the initial $100,000 IRA inheritance. As I say in my upcoming book, ‚ÄúWise Money: 10 Financial Strategies of Millionaires‚ÄĚ, “It‚Äôs not how much you earned that matters, but how much wise money you have.‚ÄĚ Wise money is money earned and kept.”
Now that we‚Äôve gone over a few common mistakes, here are some strategies for retirement that you may find beneficial:
Using One-Tie vs. Two-Tie Beneficiary Designations
With One-tie Beneficiary Designations, you would name your spouse as the Primary Beneficiary and children/grandchildren as contingent beneficiaries concurrently as illustrated above. With Two-tie Beneficiary Designations, you would name your spouse and children only. The One-tie Strategy can help facilitate generational wealth transfer to children/grandchildren.
Be Smart in Naming Your Beneficiaries
Qualified accounts pass on to the named beneficiary upon your death. A common mistake I see is a person utilizing a will to plan the directives, thinking they will override the beneficiary designations on the IRA Forms. Only those named on the beneficiary forms of the account(s) will receive the money, since IRAs are governed by federal laws, and wills are governed by state laws.
Of course, these are just a few mistakes and suggestions to help course-correct over time. As always, consult with your financial professional before making any changes to your retirement portfolio.
4 ‚ÄúBull Markets since 1871: Duration and Magnitude.‚ÄĚ Tobias Carlisle, April 17, 2013
This content was brought to you by Impact PartnersVoice. Dr. Michael Okolo-1 does not provide legal or tax advice. Insurance and annuities offered through Wisdom Financial Corp (WFC) and Dr. Michael Okolo-1, MD Insurance License #51107. DT006317-0120