Life can be unpredictable. What might seems like a good idea today can become a bad idea tomorrow. Thus, it can be hard to truly plan for the future when you don’t know what it holds. It’s also what makes life so unpredictable. Luckily (or should that be surprisingly), the IRS realizes this and has allowed some flexibility with what you can do with your IRA(s). For example, they know that there may be times when you need more money than your annual required minimum distribution (RMD). Therefore, they allow for you to take about more than your RMD amount. Another example is that they allow you to take a withdrawal–obviously, so long as you meet requirements–even if you already took your RMD. Even if you rolled that RMD back into your IRA, you can still take a distribution. Keep in mind with rollovers, there is still a once-per-year rule, but that is suspended for 2020 RMDs until August 31, 2020 (you have until that date to roll your 2020 RMD back into your IRA). While the IRS often gets painted as cruel, they do realize–occasionally–that life can be have some unexpected turns and that you should be able to have to flexibility financially to meet those twists and turns. If you want to roll your 2020 RMD back into your IRA or just want to figure out whether you can take our more than your RMD, I strongly encourage you to talk with a certified financial planner or wealth managers. They can help to make sure you take the right steps.
If you have an IRA, you are probably familiar with the one rollover per year rule it comes to rollovers between the same type of IRA (i.e. traditional to traditional IRA). As stated, the rule only allows one rollover per year between the same type of IRA, regardless of how many IRAs you have. If you have 3 traditional IRAs, you only get one rollover between them all. That’s it. It’s important to know when that 365 day period begins. It does not begin when the money ends up in the final retirement account, but rather when the distribution from the original account is received. This is important to know if you want to have an idea as to when you can complete another rollover and to prevent being penalized. It should be noted, however, that this limitation does not count in regards to traditional IRA to Roth IRA conversions, trustee to trustee transfers, IRA to employer plan, employer plan to IRA, and employer plan to employer plan transactions. Basically, it only counts for Roth to Roth or Traditional to Traditional IRA transactions. If you are considering a rollover, you should speak with a wealth manager or certified financial planner to make sure you can do on and to ensure that you do it correctly.
If you are married, you may have discussed with your spouse what you plan to do with each others estates should one of your pass before the other. This discussion–and other similar ones–is important and can make the period after the passing of a spouse less difficult than it needs to be. As part of those discussions, you may want to talk about what you both will do with an Inherited IRA, if you or your partner have one. There are really three main options for the spouse inheriting the IRA. The first is to leave the IRA as it is and begin taking distributions based on your own life and related factors. The second option is to rollover the IRA to an inherited IRA, which is the same option that a non-spouse beneficiary has. The final option–this is one that only spouses have–is to rollover the IRA into an existing or new IRA that is in your name. If you choose this third option, you will need to notify both the custodian of the IRA you are rolling over into as well as the custodian of your spouse’s account. Also, if you choose the first option, you can treat the IRA as your own if you make a contribution or fail to take required minimum distributions (RMDs) as if the account were inherited. It should also be noted that you may have to take additional steps if there are other beneficiaries listed for the IRA you inherit. These options can include getting the other beneficiaries to disclaim the inheritance. Another possibility is taking a distribution of your share of the account and rolling it over to an IRA in your own name within 60 days of receiving the distribution. As you can see, there really is no right or wrong option and your decision will most likely be impacted by where you are at that point in life as well as your own retirement account situation. Regardless of what you decide to do with an inherited IRA, you should speak with a certified financial planner or wealth manager before rolling anything over to ensure that you are following all the proper steps.
Do you want to know a little financial secret on how to avoid rollover headaches? It’s simple, don’t do them! I’m not kidding. Rollovers, especially 60-day rollovers, can be complex as there are limitations on how many you can do each year and how long you have to move the funds. If you don’t read up on the rules or track the time between when the funds are disbursed to when they must go back into an account, you and your retirement funds could be in for a world of hurt. And yes, there are ways to avoid a rollover altogether. The best–and most efficient–ways to do so are through transfers and direct rollovers (yes, I know this is about avoiding rollovers, but direct rollovers are an exception). If you are moving money between IRAs of the same type (i.e. Roth IRA to Roth IRA), then you will want to do so through a direct transfer. If you are moving money from an employer plan to an IRA, then you will want to do so through a direct rollover. By using either of these types of transactions, you can avoid rollover issues, particularly those pertaining to 60-day rollovers. Aside from avoiding 60-day rollover rules, direct transfers in particular, also allow you to circumvent the once-per-year rollover rule too. This means that you can do as many as you need or want to do. The key to these types of transactions is that the money moves from custodian to custodian and not from custodian to you. If the money is sent to you, then it’s treated like a distribution and can open you up to certain rules and limitations. You don’t want to deal with that! As always, if you have questions about direct rollovers and transfers, you should speak with a certified financial planner.
Just because you are taking advantage of your employer plan’s “still working” exception doesn’t mean you won’t eventually want to tap into your nest egg. Sure, you may delay it for a few years, but that doesn’t mean you won’t still want to take distributions–or roll it over to an IRA–while you are still working. If you decide to do a rollover, you need to be careful that you do not have to take a required minimum distribution (RMD) for the year. If you do have an RMD, you will have to take that RMD before you do the rollover. As with all other RMDS, that RMD is also not eligible to be put into another retirement account. You also cannot aggregate that RMD with your IRA RMDs even though the balance of the employer plan is going into the IRA. The RMD must also be taken before the rollover occurs or else you may wind up with an excess contribution and have to face potential penalties if not corrected in a timely manner. Essentially, the RMD must be taken before the rollover to avoid any issues. If you are considering rolling over an employer plan to an IRA later in life, you should speak with your plan custodian or– better yet–a certified financial planner to ensure that you follow all the proper steps.
When you transfer money between an IRAs or between a qualified retirement plan and an IRA, you’ve probably heard that the best way to do so is through a direct transfer. But do you know why that is? First off, it’s incredibly simple as the money never touches the hands of the account holder and goes from custodian to custodian (or from account to account). Another advantage of a direct transfer is that there is no limit on the number of transfers that can be done over the course of a year, unlike a 60-day rollover which you are limited to only one per 365 days. Another positive in terms of direct transfers is that they are not subject to any withholding rules, which leaves more money in your pocket. Finally, there are certain situations in which a direct transfer is the only way to transfer money. Such situations in which a direct transfer is required is when an Inherited IRA is to be transfer from one custodian to another or if IRA assets are awarded in a divorce proceeding. While all these things make direct transfers very appetizing when it comes to moving money between accounts or custodians, it’s really the ease and simplicity that are the biggest selling points. If you are considering a direct transfer of your retirement funds between accounts or custodians, be sure to talk with a certified financial planner to make sure you follow all the proper steps.
Yesterday, I wrote about diversifying your retirement savings by having more than one type of retirement account. While such a concept is a good idea, it also needs to be done reasonably. While it’s okay to have more than one retirement account, it’s not a good idea to have multiple types of the same account or to have so many retirement accounts that you can’t keep track on them. If you find yourself in such a situation, you should consider streamlining your retirement accounts by doing a conversion or rollover so that you only have two, maybe three, accounts. Thus, if you have multiple IRAs, you should strongly consider rolling them over into one account. This will not only allow you to better track your money, but it will also save you on paperwork as one IRA means only one beneficiary document and one statement. Same thing goes with 401(k)s. If you find that you have multiple 401(k)s after working for multiple employers, I would strongly urge you to merge them all into one account. Again, this will save you time and paperwork hassle. This is even more important as you get closer to retirement and have to begin taking required minimum distributions (RMDs) as it will make it easier to calculate your distribution and ensure that you are meeting requirements. While this may seem a bit contrary to what I wrote about yesterday, it is really intended to make things easier for you. Furthermore, yesterday I was encouraging diversification and having multiple accounts of different types and not multiple accounts of the same type. This time of year is a good time to consider streamlining your retirement accounts also because tax season is right around the corner and you probably are going to review your account paperwork very soon, if you haven’t already. If you need help with streamlining your retirement savings, as always, you should speak with a certified financial planner or retirement expert.
Do you know your options should you inherit an IRA from a spouse? There are often multiple choices regarding what you can do with the money. Furthermore, your options may be impacted by your spouse’s age when they passed, especially if they are under the age of 70½. Your age may also play a factor into your decision. One common option is to roll the IRA money into your own IRA and begin taking required minimum distributions (RMDs) either immediately if you are over age 70½ or when you turn 70½ if you are under that age at the time of the rollover. Another option is to create an inherited IRA, on which the RMDs don’t kick in until the deceased spouse would have reached 70½. The first option might be most effective if you are close in age and are either just at or very near to 70 1/2 because there really won’t be much of an opportunity for the money to grow before RMDs start. The second option works best if you find that you have time for the money to grow. Such a situation might be if your spouse passed in his/her late 50s or early 60s and you have a number of years for the IRA to increase in value. However, another option–and a creative one at that–is a combination of both the aforementioned possibilities. This option involves creating a inherited IRA and then rolling the money over to your account with a spousal rollover right before the date at which your spouse would have reached age 70½. This allows you to let the money in the inherited IRA to grow and not be hit with RMDs until you really need it. This option may be appealing a surviving spouse who is much older than the spouse who passed. This will allow the older spouse to use their own IRA money first and let the inherited IRA grow before rolling it over and taking RMDs on it. This last option might not be for everyone as it may not be worth it for everyone, especially couples who are close in age or where the spouse who passed was right on the cusp of RMD taking age. However, regardless which option you choose to pursue, you should talk with a certified financial planner or retirement specialist first to make sure that you are making the right decision and doing things correctly.
You may not realize it, but there the money in your Roth IRA will be distributed in a particular order. The order is important as it will determine any potential tax consequences you may have when you take a distribution from your account. In a Roth IRA, there are generally four (4) classifications of assets within an account: (1) regular contributions, (2) taxable conversion and rollover amounts, (3) non-taxable conversion and rollover amounts, and (4) earnings on Roth IRA assets. Remember, that your contributions are tax-free, but that doesn’t mean that other money in the account is not taxable. Thus, for example, if you take a withdrawal that is larger than your contribution total in your account, that amount beyond your contributions amount will be taxable, especially once it dips into any taxable conversion/rollover money or earnings. Knowing that there may be a potential tax consequence should factor into your decision to make a withdrawal and consideration of how you much to withdraw. If you know you may get into taxable money and you are taking an early distribution, you may want to really think long and hard about whether you are making a good decision or if there is another place to get the funds you need. If you are considering doing a withdrawal from a Roth IRA, or just want to have an understanding of the type of money you have in your Roth IRA, you will want to speak with a certified financial planner or tax professional.
There’s a good chance that you either have or will change jobs multiple times throughout your career. Those job changes may be in the form of promotions within a corporation or jumping to a new company to take a higher position with increased pay and responsibility. Your job change may even involve a career change! However the inevitable job change occurs, don’t forget about your retirement funds and savings when you do so. With many employers offering retirement benefits–and with potential legislation allowing for more smaller companies to offer them in the future–chances are you have (or had) an employer plan; most likely a 401(k). You will need to think about what you want to do with such plans when you leave an employer. Will you want to roll it over into another plan? Can you maintain that plan even though you no longer work for that employer and does doing so make sense? What are the costs and fees associated with taking the money and running? These are all important questions that you may need to answer and consider. You will also want to make sure that you understand any deadlines or limitations involved with whatever you decide. You don’t want to miss a deadline–or worse, forget about the account altogether (yes, this does happen). You also want to make sure that any moves you make with that retirement money is done as efficiently and in as cost-effective a manner as possible. You would be wise to discuss any such moves with a financial planner before making them so as to make sure you are making the decision that’s right for you.