GUEST POST from Don: The I.R.A. Problem(s)

THE I.R.A. PROBLEM(S)

I don’t know everything that I should … which causes me to suspect there are others who also don’t know.  I could be wrong.  But I can’t imagine how,  then, it hurts to remind them.  Here goes…

An IRA, Keogh, 401k, or SIMPLE (or other similar) retirement plan is a very good idea which can turn bad, and quite easily.  This is not a “set it and forget it” kind of program.  It takes planning and occasional review.  

FIRST, How much are you going to put INTO your plan?  The key idea is to SAVE on taxes now when your tax rate is higher and withdraw later when your tax rate is lower.  But if you put too much into such a plan, and it grows appropriately, it is possible to take out your tax-deferred money at a higher tax rate than when you worked.  I don’t think you want that to happen, but I could be wrong.  Maybe you DO want to pay a higher tax rate???  

So, as you near retirement (around age 60) you should begin doing calculations.  According to the tax man, how old will you be when you die?  Then divide your RMDs (distributions) based upon taking them starting at age 65, age 70, and age 75 until the year the government has determined you will die.  Will waiting until 75 cause a tax problem?

A higher distribution than you expected may cost you more than an increase in your tax rate, it could also push you into a higher Medicare Part B premium level.  A “single” retiree who has an overall taxable income (including IRA distributions) greater than $103k will pay an additional premium of $70 per month.  (It can be much more so look it up.)  Think about THIS: What if your spouse dies and you lose your marital discount (become single) … (or, what if you die and your spouse inherits your taxable income) now you (or your spouse) may have to pay more for your Part B premiums.  It happens.  It could be a serious financial hit at a critical time.  Your retirement plans should include how to financially prepare for the death of a spouse (not just burial costs and final expenses).

SECOND, When are you planning to begin RMDs?  (Withdrawals).  It used to be required to begin no later than at age 70 ½.  Soon you will be able to wait until age 75.  That’s bad (see above, too.)  If you delay you will be taking larger amounts of RMD out per year than you expected when you put the money in.  The helpful news is that you can begin to make withdrawals much earlier without penalty.  (By the rules, if you started your IRA investment more than 5 years before, you can begin withdrawals as early as at age 59 ½.)  Of course, if you time that appropriately, those withdrawals can be transfers to a ROTH IRA.  You will pay the taxes on the smaller amounts, thus hopefully a lower tax rate, and then get to enjoy watching the money grow in the ROTH without future taxes.  If your IRA has more than $200k you should investigate whether you should begin withdrawals before age 70.  This may allow you to pay the lower tax rate you were expecting.  

THIRD, Are you planning on leaving your traditional IRA to an inheritor?  This can become a serious MESS!!!  A spouse can inherit your IRA with almost no problems, but…

If you can avoid doing so, DON’T leave a large amount of money in a traditional IRA for non-spouses to inherit.  They don’t get the benefit of your RMD program; they get a “special” one which distributes the money in much larger bundles and causes tax headaches for them.  It is so much better to begin RMDs early to knock down some of the principal so not so much is left in this type of retirement vehicle.  Consider choosing to make your ROTH IRA as your primary investment and the regular IRA as a secondary one by the time you reach full retirement age.

Some experts suggest that you should NOT consider leaving your traditional IRA in your “estate.”  If you do, the entire IRA may have to be liquidated at your death and transferred to your estate for distribution among heirs and, of course, if that is the case it receives no RMD tax breaks as a result.  The tax expense could be more like 40% than 12 or 18%.  Your heirs will not thank you for that.  Its your money and I don’t think your plan is to gift the government with a 12% bonus when you pass!

Do your homework and remember that some rules differ by state.

So, if these issues with an I.R.A. might affect you … let me be the first to congratulate you for a job well done.  Hopefully, this post will help you.  One could imagine that the goal was merely achieving a funded retirement.  Turns out there are landmines everywhere!

I was unaware of these specific risks when I was preparing for retirement.  How about you?

[PLEASE NOTE that Don is always open to discussing the thoughts and opinions he shares here and welcomes comments as shared in the comment section. He doesn’t use other social media platforms and won’t see whatever you’d like to share with him if you post it elsewhere.
ALSO, Don is always open to offer his thoughts on various topics. If you have a specific request, you can let him know in a comment; he reads – and replies to – them all. ~ Sherry]

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