ROLLOVER MISTAKES ARE OFTEN IRREVOCABLE

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Jim Lorenzen, CFP®, AIF®

Believe it or not, over the years I’ve had many new clients come to their first planning meeting having already made bad, and often irrevocable, choices on their own – yes, even prior to planning; and, I’m sure I’m not the only financial planner who’s seen this.   Most often, the mistakes are made in Social Security claiming elections, often based on pre-conceived internal bias and no calculations; but, sometimes the decisions involved their 401(k) plans.

According to Cerulli Associates, rollovers from 401(k)s and other retirement plans will cause IRA assets to reach $12 trillion by 2020.

According to retirement expert, Ed Slott, who also happens to be a practicing CPA, it’s worth understanding that every time IRA or 401(k) money is touched, it’s a gamble for those who don’t know what they’re doing.  He says it’s like an eggshell – break it, and it’s over.

Here’s something few people really get:  If you make a mistake on the rollover, it’s possible you could lose the IRA entirely!   Boom!  It’s irrevocable.

A number of years ago, I wrote a report,  Six Best and Worst IRA Rollover Decisions,  and  one of the mistakes I mentioned was in not recognizing you probably shouldn’t do a rollover at all!

Why?  First, you have to understand what a rollover is – as the well as the difference between a rollover and an custodian-to-custodian transfer.  A rollover happens when money has been withdrawn from a 401(k) and deposited into an IRA.  When that happens, the client is required to do the necessary withholding, pay the tax and wait for a refund the following year.  A transfer of the account directly between custodians avoids that problem; but, there’s a potentially bigger one.

Example:  If a rollover has been previously rolled over in the past 12 months, the entire account now becomes taxable, and there’s no fix to correct the error.   Someone with a $500,000 or $1 million (or any other size) IRA could be in for a big shock.  Taxes will be due at their new rate – this withdrawal likely puts them in a new bracket – and the money left is no longer tax-deferred!

A direct transfer would have avoided this problem.

Keep Up with New Rules

A lot of seniors have CDs and IRAs at banks.  Last year, you could do one rollover per year for each of your IRA accounts.  No more.  Now, the law is one rollover per year for ALL IRA accounts – and that includes Roth IRAs.  Two rollovers means that one of them will be no good.

Inherited IRAs

Here’s where mistakes can, and do, happen far too often; because the rules are different – and stiffer.

Did you know a non-spouse beneficiary can NOT do a rollover?  A child who inherits a parent’s IRA must be careful.  Often , because the child wants to access the money right away, an attorney  will put the child’s name on it.  When that happens, that’s the end of the account.  It just became a taxable distribution.  It should have been set up as a properly titled and inherited IRA.   Putting the money into the beneficiary’s IRA is a terrible mistake.

 Beneficiary Designation

Too often, problems happen because people fill-out the beneficiary forms and forget them – never reviewing them.  Failure to do this only puts off the day when siblings get “lawyered-up”  because  the investor didn’t understand the true meaning of the distribution designations.

There’s more to know, of course; but, hopefully this will get you thinking… and doing your homework before making mistakes that can’t be changed.   Working with a professional who’s been down the path before can’t hurt, either.

Jim

 

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.

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