10 Common IRA Mistakes

1. Failing to complete an indirect rollover within 60 days.

        An individual only has 60 days to reinvest the funds, including amounts withheld for tax purposes - or risk losing the tax-deferred status of the investment.

2. Spousal continuation mistakes.

        Some missed planning opportunities may occur where the rollover or spousal continuation is accomplished without first considering all possible options.  While the surviving spouse has the option of treating his/her late spouse's IRA as their own, or rolling the IRA assets into their own IRA, they may not with to do so in every case.

3. Failing to name a beneficiary.

        A lack of a named beneficiary can require distributions from the IRA, loss of the stretch capability and can result in probate.  Whatever happens, don't make this mistake!  One common mistake occurs when an IRA owner fails to name a beneficiary.  Unlike other property, IRA's do not pass by a will, rather, they pass according to the terms of the IRA's Beneficiary Designation Form. 

4. Failing to review and update beneficiary designation forms.

        Clients may make distributions to unintended beneficiaries, such as an ex-spouse.  Need I say more?

5. Beneficiaries fail to "Stretch" their IRA distributions

        Beneficiaries often liquidate their inherited IRA too quickly, resulting in immediate income taxes due.  A "Stretch" plan can help pass IRA assets to beneficiaries by providing the following advantages:
~ The beneficiaries tax liability is spread over their lifetime.
~ The undisturbed IRA assets will continue to be invested in a tax-deferred manner, even as withdrawals are being taken.
~ Additional IRA assets can be accessed when needed.

6. Transferring inherited IRA's to non-spousal beneficiaries.

        If non-spousal beneficiaries take receipt of IRA assets, it results in an immediate taxable distribution.  A common mistake is when people believe that the 60-day rollover rules apply to non-spousal beneficiaries.  They don't.  Separate rollowver rules apply to inherited IRA's.

7. Naming trusts as beneficiaries

        Naming trusts as beneficiaries of IRA's may become a tax trap for the unwary.  Although it eliminates the spousal IRA option, estate planning attorneys frequently use trusts as beneficiaries of ITA's.  If the trust is not structured properly, however, and does not qualify as a look through trust, the IRA assets will be paid out within five years after the owner passes away.  This eliminates the "stretch" option for beneficiaries and results in immediate taxation.

8. A beneficiary of an inherited IRA fails to name a successor beneficiary

        If no successor beneficiary is named and the primary beneficiary dies, the IRA will distribute to the estate, passthrough probate and will result in the loss of "stretch."

9. Overlooking income-tax deductions with respect to inherited IRA's

        Potentially large tax deductions can be missed in IRD (Income in Respect of Decedent) situations.  IRA's are considered to be IRD's.

10. Keeping assets in an employer-sponsored plan after retirement.

        You can lose important benefits bby not rolling your assets into an IRA.  While the assets will continue to receive tax-deferral and you still have the same investment options, you may be sacrificing some key planning opportunities.

Source: John Hancock

For more information about the ideas posed above and a more complete understanding of the solutions to any or all of the mistakes, please contact us via email or phone.  Guy Colella is ready and available to discuss your specific needs and circumstances.