I hope your summer months wrapped up well. For many of you, kids are now back in school and a routine is gladly welcomed. For others, this time of year may be business as usual. But may I share with you an observation I’ve had throughout my career? August and September tend to be restart months…perhaps a second New Year. Goals for the year may be revisited. Commitments slacked on become a priority again. A renewed energy might be felt to conquer certain tasks. If you haven’t already, I encourage you to revisit your goals and see what you’d like to accomplish before year-end. Once Thanksgiving comes, you’ll find it harder and harder to find that energy.

Shifting to this month’s topic, I’d like to share an article I recently read by Ed Slott, the “IRA Guru” as I call him. In this article from Ed Slott in Investments news, he shares real life stories about IRA transactions gone wrong. I think there is much to learn from these stories. Here are some thoughts.

The “Do over” option is gone

Prior to 2017, investors had the option of recharacterizing Roth IRA conversions in the event a mistake was made (or often times a better conversion opportunity occurred). The Tax Cuts and Jobs Act eliminated this strategy. When implementing a Roth IRA conversion, an investor is converting pre-tax dollars to tax-free growth dollars. How do you get there? By paying taxes on the amount converted.

In the story Mr. Slott references, an investor made a mistake by converting $2,000,000 rather than $20,000. Whew! How a simple decimal point caused significant taxes due! You might desire to be in the highest income tax bracket, but this is not the way to get there.

Working with an advisor could have helped correct this problem. Unfortunately, this investor is most likely going to tax court pleading for a private letter ruling from the IRS (which is a costly endeavor I might add).

Checking the correct box

Few realize the incredible importance of completing retirement plan rollover paperwork accurately. You could have it 95% accurate, but the 5% mistake could cost you thousands, if not tens of thousands, in taxes.

Mr. Slott references a Veterans Affairs person who attempted to do a tax-free rollover to an IRA from her Thrift Savings Plan (TSP). Rather than her retirement dollars being rolled over tax-free, she was paid directly with 20% mandatory federal tax withheld. Here’s the problem: The 20% may not be enough depending on the dollars at stake. Here’s the bigger problem: Even with this mistake, the rollover could have still occurred utilizing the “60 day rollover rule.” However, this investor was working alone and failed to get this done. And sadly, after spending considerable money on pleading her case in tax court, she lost her case.

Beneficiary Designations: Oh, How Important!

The extreme importance of proper beneficiary designations is something we have seen firsthand at Rivertree. The rules for retirement plan beneficiary designations (e.g. 401k, 403b, TSP, pension plan) and IRAs can be quite different. We often say to our clients that the “I” in IRA stands for individuals…that’s you! Qualified retirement plans set their own beneficiary and distribution rules. And their rules may not be exactly what you would desire for your beneficiaries.

Know this: Some plans will distribute 100% of the qualified beneficiary’s money paid directly to them rather than to an Inherited IRA. Whew! This is another significant tax hit that could have been avoided with proper planning.

As part of our financial review checklist, we revisit and update beneficiaries on accounts. Keep in mind that for some qualified plans, particularly pension plans, beneficiary designations are kept on file in the HR department. And these accounts could still have an ex-spouse listed as primary beneficiary. Even if you have updated your estate plan (e.g. Last Will and Testament), the beneficiary designation takes precedent over a will.

Conclusion

In closing, here’s a quote from Mr. Slott: “The tax laws are particularly complicated and unforgiving. Some mistakes, usually the biggest ones, cannot be undone. Advisers can help clients avoid these tax disasters and provide real tangible value, before the damage is done.

We would be glad to discuss with you any of the items mentioned in this article. In the meantime, finish strong for 2019!

*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.