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Rolling Over Your Retirement Plan

QUESTION: HOW CAN “TAX-INFESTED” MONEY BECOME “TAX-DEFERRED”?

You have some crucial decisions to make about how you take distributions from your hard-earned savings. Not understanding rollover regulations can lead to unintended tax consequences that chip away at your retirement funds.

The funds held in your retirement accounts are called “qualified savings,” since they qualify for special tax-deferred status by the Federal Government. If you decide to withdraw all of the money at once from those accounts, it is called a “lump-sum distribution.”

Your America’s Tax Solutions^TM retirement distribution specialist can explain the tax consequences of taking a lump-sum distribution and the benefits of rolling those funds into an IRA.

WATCH OUT

Plan administrators of your 401(k)s will not automatically assume you want to do a rollover. Also, the Tax Code provides for a 60-day window during which you can remove your qualified money from your pension plan or 401(k) and deposit into a traditional or Roth IRA. Be advised: The IRS does not trust that you will dutifully meet your 60-day obligation. If you request a lump-sum distribution, your employer is required to withhold 20% for federal income tax. Thus, on a $50,000 lump-sum distribution, you would pay $10,000 in withholding to the Federal Government.

FROM TAX-INFESTED TO TAX-FREE!

Your America’s Tax Solutions^TM retirement distribution specialist can explain how you may bypass the 20% withholding requirement by structuring the transaction as a trustee-to-trustee transfer. Your ATS specialist will also explain the legacy advantages of rolling your 401(k) into an IRA, including the ability to stretch the period of tax-deferred earnings within an IRA beyond the lifetime of the person who set up the account at a compounded, tax-deferred rate.

CAUTION: This Can Destroy Your Nest Egg…

There has been a huge spike in the life expectancy of Americans over the past several decades.  We have been conditioned to diligently save for our retirement.  We have been encouraged to have a retirement distribution strategy in place to help us maximize our retirement assets while mitigating and eliminating heavy, immediate and unnecessary taxation.  But what about that event that nobody likes to talk about that can destroy your nest egg?  This event is typically sudden, unanticipated and blindsides many Americans.   What is it?...

Today you may look and/or feel great.  Your spouse may be active and strong.  What happens if you or your spouse suddenly takes ill?  What if you or your spouse is suddenly faced with a debilitating injury or other health problem?  If you haven’t allocated some of your assets to handle a sudden illness or long-term care event, you have essentially allocated ALL of your assets to address this type of crisis. 

It may be hard to imagine yourself in a dire position now, but ignoring the fact that most Americans (or their spouse) will encounter a long-term care event at some point in their lives, will only serve to help erode the assets you have earmarked for retirement.  To give you an idea of what to expect, below are the average annual cost statistics in a few states from coast-to-coast for nursing home care.  The statistics are based on semi-private room accommodations:

If you are not sure how to handle and plan for a long-term care event, don’t keep putting it off.  All Americans should have a solid, well thought out plan to help protect themselves and their loved ones from financial and emotional devastation.  A long-term care planning assessment is a FREE service that retirement distribution specialists offer.  He or she can help you understand what options are available and what strategies make sense for you and are appropriate for your personal situation.

Does Your Current Policy Need a Make-Over?

We here at America’s Tax Solutions like to make sure our clients and their clients are always prepared.  Many Americans buy various types of insurance policies, put the paperwork in a drawer and never look at it again. Unfortunately, many of those people could be stuck with old policies they bought 10, 20 or even 30 years ago and they haven’t had them reviewed. Why is this important? Over the past several decades they may have experienced life changes and their planning needs have likely changed as well.

Did they consider things like tax diversification and tax-free retirement? Can these policies be used to help fund a college education for their kids or grandkids, protection against a long-term care disaster, and so on? If they were say 25 to 35 years old when they first selected their policies, probably not. There also may be better policies available today that didn’t exist back when they first met with their agent.

7 Points You Should Consider When Reviewing Old Policies:

1. You feel a higher rate of return may be realized with a new policy.

2. You feel that the current insurer may become insolvent and a more stable insurer can be obtained through a policy exchange or diversification of insurance carriers will increase safety and/or return.

3. You have exercised a loan provision against a policy, the interest paid on the policy is non-deductible, costs are increasing and you need to continue coverage.

4. You would like to change from an individual to a group product.

5. You can achieve a higher death benefit with a new product.

6. You would like to change an ordinary life policy into a single premium policy to eliminate the premium payment burden, obtain a higher rate of return on the underlying cash value and obtain a higher death benefit.

7. You have an ordinary life contract and you would like to exchange it for a universal, variable, or interest sensitive policy. Premium rates on the new policy are lower due to such factors as improved mortality tables, a non-smoking discount, a volume discount for several policies aggregated into one or other factors.

If you haven’t reviewed all of your active policies, it’s important to dust them off and take a look to make sure they still provide you with what you want. If you are unsure where to begin, don’t hesitate to reach out immediately to your retirement distribution expert, tax professional or agent. Remember, a basic policy review should always be a FREE service from your trusted advisors!

“Live Chat” = 60-Day Rollover Error

We’ve all seen that little “Live Chat” window pop up on our computers when we are browsing on certain websites. The anonymous text box repeatedly asks: “What is your name? How can I help you?” Unfortunately “help” isn’t always what you end up with when engaging in a live chat session.

As two taxpayers discovered, choosing to “Live Chat” with a random unknown customer service representative from a financial institution about your IRA transactions can be disastrous.

In Private Letter Ruling (PLR) 201452027, a taxpayer discovered that his IRA funds were deposited into an improperly titled IRA. Why is that a problem? He only had 60 days to complete the rollover and the error wasn’t discovered until the following year. The original transaction was accomplished with the help of the IRA custodian’s “Live Chat” feature on their website where customers can ask questions and make transactions on-line. The IRA titling error resulted in a failed 60-day rollover transaction – a fully taxable distribution!

Fortunately, the taxpayer had all of the necessary documentation to support the fact that it was an error due to the “Live Chat” representative’s advice and actions. The 60-day rollover waiver was granted but only after a lot of time and money was needlessly spent to obtain the PLR.

This recent PLR is a reminder of how important it is to not only speak with qualified professionals about your IRA but to also choose wisely when it comes to selecting your IRA custodian.

Tax Tip: Using In-Service Withdrawals for Planning Strategies

Do you have a 401(k) and want to use a portion of your funds for something else that is well suited to your planning goals and retirement needs? In-service withdrawals may be available from your 401(k) or other qualified retirement plan while you are still working and contributing to the plan.

In-service withdrawals may be directly transferred to an IRA or other qualified plan that offers you additional or alternative investment and retirement distribution options.

It is important to find out from the plan administrator what your plan’s limitations are before initiating an in-service withdrawal. There could be, for example, eligibility restrictions. This type of information should also be contained in your plan documents.

Using in-service withdrawals for planning strategies to help achieve your retirement goals can be great, but it is important to first discuss this option with your personal retirement distribution planning specialist or other professional advisor to help ensure this is appropriate for your situation.

*Keep in mind that an in-service withdrawal is not the same as a hardship withdrawal.

What is the Three Year Rule?

Certain assets are to be included in your gross estate under Section 2035 of the Internal Revenue Code, if you transferred or gifted those assets within three years of your death. This will naturally increase your gross estate value and can increase estate taxes upon death.

This rule wasn’t intended to deter people from giving gifts or transferring assets to their loved ones. It was intended to prevent taxpayers from trying to unfairly reduce or avoid federal estate tax liability once they became aware that their death is imminent by intentionally (and gratuitously) transferring ownership interest of certain assets to others.

This rule doesn’t apply to all assets but primarily applies to certain insurance policies, transfers effective at death, assets in which the owner retains a life interest and revocable transfers.

Sources: I.R.C. Sections 2035, 2036, 2037, 2038 and 2042.