Simplifying Your Retirement Plans

Co-Contributed by: Matthew E. Chope, CFP® and Gerri Harmer

If you’re like most, you have multiple retirement plans from previous employers. These may be hard to track and lead to piles of paper statements. Recent rulings make it easier to consolidate accounts and potentially save on fees.

Recent changes in rulings now allow most retirement plans to be “rolled over” to other qualified plans that previously were not allowed including Simple IRAs and 401ks. One exception is you must hold your Simple IRA for two years before funds can be moved in or out of the account without paying tax penalties.  Pictured is a chart showing permissible roll over types.

Things to consider before acting:

• Compare investment offerings and fees for each account to find the best choice to roll into. These are usually located on your statement or in the prospectus. You can also call the phone number on your statement to inquire.

• Consider consulting a financial advisor to get the best overall financial picture.

• Funds must be withdrawn and redeposited within 60 days to avoid paying tax penalties.

If you have questions on how to get started, or want to talk with a professional on what your rollover options our, please reach out to your CERTIFIED FINANCIAL PLANNER™ here at The Center.  

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

Gerri Harmer is a Client Service Manager at Center for Financial Planning, Inc.®

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. Tax matters should be discussed with an appropriate tax professional.

Non-Qualified Deferred Compensation (NQDC) Plans

Contributed by: Kali Hassinger

A Non-Qualified Deferred Compensation plan (NQDC) is a benefit plan offered by some employers to their higher earning and/or ranking employees. Some of you may have heard of these plans referred to as “Golden Handcuffs” because they often require that an employee stay with their current employer, or at least not move to a competing firm, in order to receive the compensation. This nickname provides both a negative and positive connotation, but, when appropriate, NQDC plans can offer employees greater control over their income, taxes, and financial future.

NQDC plans, unlike your typical 401(k), are not subject to limitations or non-discrimination rules. That means that the employer can offer this benefit to specific employees and there is no restriction on the dollar amount deferred. This is advantageous to an employee who is expecting to be in a high tax bracket, is already fully funding their retirement savings plan(s), has a surplus in cash flow, and may foresee a time when their taxable income will be reduced. With this strategy, the employee and employer agree upon a date in the future to pay the employee his/her earned income. Both parties agree to when the funds will be received in the future, and it isn’t taxable income until it is actually received by the employee.

In most cases, these plans are considered “unfunded” by the employer, which means that the money isn’t explicitly set aside for the employee. This scenario creates a certain level of risk for the employee because the funds would be subject to any future bankruptcy or creditor claims. There are some strategies that the employer can utilize to mitigate the risk (involving trusts and insurance), but they need to uphold the NQDC status. Otherwise, the deferred compensation amount will become fully taxable to the employee along with a 20% penalty. Funded NQDC plans exist as well, and these plans set the deferred compensation assets aside exclusively for the benefit for the employee. Funded plans, however, open themselves back up to ERISA requirements, making them far less popular.  

When an employer and employee enter in a NQDC agreement, it can be a win for both parties.  Employers are securing that valued employees will remain loyal, while employees are able to reduce their taxable income now. 

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Kali Hassinger and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with the appropriate professional.

Webinar in Review: Employee Benefit Open Enrollment

Contributed by: Clare Lilek

Each September, as school is back in session and fall is right around the corner, the last thing on your mind is “How can I make the most of my employee benefit enrollment that’s happening soon?!” It may not be the most exciting topic, but enrollment for your employer’s benefit package happens once a year, usually in late September and early October, and can affect the benefits and coverage you receive for the following twelve months. So it is very much worth your time to look at what your company offers and weigh the pros and cons of all your options. Luckily for you, Nick Defenthaler, CFP®, recently hosted a webinar that outlines the various benefits your company could offer and how you may go about electing certain packages. Below are a few highlights from the 30-minute webinar. For a more detailed explanation, watch the full webinar recording below!

Retirement Savings Plans

• Choosing a Traditional (pre-tax) or a Roth (post-tax) plan depends on your current tax bracket versus your projected tax bracket when you retire.

• Make sure you are always maxing out your employer match at the very least. In order to make sure you are continually growing your retirement account, consider add 1-2% each year to your contributions.

• Choose a mix of investment options that are aligned with your risk tolerance.

• Ride out the changes in the market. It’s important not to make constant portfolio changes.

Executive Compensation Plans

These types of compensation plans are typically used as incentive compensation. They can vary from company to company but some of the options include: stock options, non-qualified deferred compensation plans, and employee stock purchase plans. We are currently doing a blog series on Stock Options (NSOs, ISOs, and RSUs); make sure to look out for these for a more detailed overview.

Health Insurance

Nick did a high-level overview of the different types of plans and options you may encounter when it comes to company health insurance. When choosing between a PPO or HMO, you could be choosing between the flexibility of additional benefits (PPO) or the lower cost for potentially more restrictive benefits (HMO). He also highlights the importance of reading the fine print when adding a spouse to your benefits. Lately, many companies have a spousal surcharge that makes it more expensive for a spouse to be insured on your plan if they have access to insurance through their own employer. Nick also noted that some companies are making the move to high-deductible plans, which lower their premiums but put the “buying power” back in the hands of the insured.

Flex Spending Accounts

Nick continued to describe the potential benefit of using a Flex Spending Accounts, whether it’s for medical or dependent care deductibles.  When pretax contributions are used for qualified medical expenses, within the year of contribution, they continue to go untaxed. To learn how you could potentially save some tax money, make sure to tune in to this part of the webinar!

Other Insurances

To wrap up, Nick went through disability insurance and life insurance options. He weighed the pros and cons for group vs individual coverage, and how some employees might want to consider long-term and short-term disability coverage.

If you have any questions about this webinar or your specific benefits, don’t hesitate to reach out to Nick.

401(k) for Solo Business Owners

Contributed by: Matt Trujillo, CFP®

If you're self-employed or own a small business, you've probably considered establishing a retirement plan. If you've done your homework, you likely know about simplified employee pensions (SEPs) and savings incentive match plans for employees (SIMPLE) IRA plans. These plans typically appeal to small business owners because they're relatively straightforward and inexpensive to administer. What you may not know is that in many cases an individual 401(k) plan (which is also known by other names such as a solo 401(k) plan, an employer-only 401(k) plan, or a single participant 401(k) plan) may offer a better combination of benefits.

What is an individual 401(k) plan?

An individual 401(k) plan is a regular 401(k) plan combined with a profit-sharing plan. Unlike a regular 401(k) plan, however, an individual 401(k) plan can be implemented only by self-employed individuals or small business owners who have no other full-time employees (an exception applies if your full-time employee is your spouse). If you have full-time employees age 21 or older (other than your spouse) or part-time employees who work more than 1,000 hours a year, you will typically have to include them in any plan you set up, so adopting an individual 401(k) plan will not be a viable option.

What makes an individual 401(k) plan attractive?

One feature that makes an individual 401(k) plan an attractive retirement savings vehicle is that in most cases your allowable contribution to an individual 401(k) plan will be as large as or larger than you could make under most other types of retirement plans. With an individual 401(k) plan you can elect to defer up to $18,000 of your compensation to the plan for 2016 (plus catch-up contributions of up to $6,000 if you're age 50 or older), just as you could with any 401(k) plan. In addition, as with a traditional profit-sharing plan, your business can make a maximum tax-deductible contribution to the plan of up to 25% of your compensation (up to $265,000 in 2016).  Since your 401(k) elective deferrals don't count toward the 25% limit, you, as an owner-employee, can defer the maximum amount of compensation under the 401(k) plan, and still contribute up to 25% of total compensation to the profit-sharing plan on your own behalf. Total plan contributions for 2016 cannot, however, exceed the lesser of $53,000 (plus any catch-up contributions) or 100% of your compensation.

For example, Dan is 35 years old and the sole owner of an incorporated business. His compensation in 2016 is $100,000. Dan sets up an individual 401(k) plan for his retirement. Under current tax law, Dan's plan account can accept a tax-deductible business contribution of $25,000 (25% of $100,000), plus a 401(k) elective deferral of $18,000. As a result, total plan contributions on Dan's behalf can reach $43,000, which falls within Dan's contribution limit of $53,000 (the lesser of $53,000 or 100% of his compensation). These contribution possibilities aren't unique to individual 401(k) plans; any business establishing a regular 401(k) plan and a profit-sharing plan could make similar contributions. But individual 401(k) plans are simpler to administer than other types of retirement plans. Since they cover only a self-employed individual or business owner and his or her spouse, individual 401(k) plans aren't subject to the often burdensome and complicated administrative rules and discrimination testing that are generally required for regular 401(k) and profit-sharing plans.

Other Advantages of an Individual 401(k) Plan

Large potential annual contributions and straightforward administrative requirements are appealing, but individual 401(k) plans also have advantages that are shared by many other types of retirement plans:

An individual 401(k) is a tax-deferred retirement plan, so you pay no income tax on plan contributions or earnings (if any) until you withdraw money from the plan. And, your business's contribution to the plan is tax deductible.

• You can, if your plan document permits, designate all or part of your elective deferrals as after-tax Roth 401(k) contributions. While Roth contributions don't provide an immediate tax savings, qualified distributions from your Roth account are entirely free from federal income tax.
• Contributions to an individual 401(k) plan are completely discretionary. You should always try to contribute as much as possible, but you have the option of reducing or even suspending plan contributions if necessary.
• An individual 401(k) plan can allow loans and may allow hardship withdrawals if necessary.
• An individual 401(k) plan can accept rollovers of funds from another retirement savings vehicle, such as an IRA, a SEP plan, or a previous employer's 401(k) plan.

Disadvantages

Despite its attractive features, an individual 401(k) plan is not the right option for everyone. Here are a few potential drawbacks:

• An individual 401(k) plan, like a regular 401(k) plan, must follow certain requirements under the Internal Revenue Code. Although these requirements are much simpler than they would be for a regular 401(k) plan with multiple participants, there is still a cost associated with establishing and administering an individual 401(k) plan.
• Your individual 401(k) plan assets are fully protected from your creditors under federal law if you declare bankruptcy. However, since an individual 401(k) plan generally isn't subject to ERISA, whether your plan's assets will be protected from your creditors outside of bankruptcy will be determined by the laws of your particular state.
• Self-employed individuals and small business owners with significant compensation can already contribute a maximum $53,000 by using a traditional profit-sharing plan or SEP plan. An individual 401(k) plan will not allow contributions to be made above this limit (an exception exists for catch-up contributions that can be made by individuals age 50 or older).

If you think an Individual 401(k) might be the right vehicle for you, we encourage you to contact your financial planner to work through your individual situation to make the right choice for you.  Feel free to reach out to us if you think we can be of help!

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matthew Trujillo and are not necessarily those of Raymond James. Prior to making a retirement plan decision, please consult with your financial advisor about your individual situation. Roth account owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

How to Make Grants from Donor-Advised Funds

Contributed by: Matthew E. Chope, CFP®

I talk to a lot of clients who have set up Donor-Advised Funds or family foundations and are confused. They’ve figured out how to put money in, but how to make grants isn’t always as clear. The IRS prohibits using these funds to satisfy a pledge. That doesn’t prohibit you from supporting organizations like churches, but it does mean you need to follow certain steps.

The first step is to talk to your attorney and your CPA. They can give you tax and legal advice about making a grant. Carla Hargett, the Vice President of Raymond James Trust, told me if you’re planning on giving to your church, for example, she believes the best way to handle the Donor-Advised Fund Grants is to start by discharging any pledge made in the past. Donor-Advised Funds cannot be used to satisfy a pledge. You can let your church know you intend to provide General Support for a certain amount of money and year(s) going forward. The amount can be close to an amount you’ve given in the past – that’s up to you. But any legally enforceable pledges must be cancelled first. This should stop the audit trail if the IRS ever decides to get into the particulars with a grantor. So make sure the grant requests from your Donor-Advised Fund should say something like "2016 General Support.”  

When pledge time comes around, I recommend that you write on the pledge card something like, "I intend to request a distribution of $XXXX.XX from my Donor-Advised Fund during the 20XX fiscal year." Your church or charitable organization will be familiar with this language and can use it for budget planning similar to a pledge.

We just want to make sure that Grantors of donor-advised funds are doing things as accurately as possible and if an IRS auditor someday digs into your grants, you’ll have nothing to worry about.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Matt Chope and not necessarily those of Raymond James. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Unpacking Incentive Stock Options

Contributed by: Matt Trujillo, CFP®

What is an ISO?!

Some of you reading this might have been granted Incentive Stock Options (ISOs) in the past or perhaps this is something that your employer recently started to grant you. In either case it never hurts to get a refresher on what they are and some of the nuanced planning opportunities that go with them. ISOs are a form of stock option that employers can grant to employees often to reward employees' performance, encourage longevity with the company, and give employees a stake in the company's success. A stock option is a right to buy a specified number of the company's shares at a specified price for a certain period of time. ISOs are also known as qualified or statutory stock options because they must conform to specific requirements under the tax laws to qualify for preferential tax treatment.

The tax law requirements for ISOs include*:

• The strike price—the price you will pay to purchase the shares—must be at least equal to the stock's fair market value on the date the option is issued.

• To receive options, you must be an employee of the issuing company.

• The exercise date cannot be more than 10 years after the grant.

*Special rules may also apply if you own more than 10 percent of your employer's stock (by vote). Nonqualified stock options, another type of employee stock option, are separate from ISOs therefore receive different tax treatment.

Once you have been granted a stock option, you can buy the stock at the strike price even if the value of the stock has increased. If you choose to exercise a stock option, you must buy the stock within the specific time frame that was set when the option was purchased or granted to you. You are not required to exercise a stock option.

Your options may be subject to a vesting schedule developed by the company. Unvested options cannot be exercised until some date in the future, which often is tied to your continued employment. The stock that you receive upon exercise of an option may also be subject to a vesting schedule.

Assuming that a stock option satisfies the tax law requirements for an ISO, preferential tax treatment will be available for the sale of the stock acquired upon the exercise of the ISO, but only if the stock is held for a minimum holding period. The holding period determines if a sale of the stock you received through the exercise of an ISO is subject to taxation as ordinary income or as capital gain or loss.

To receive long-term capital gain treatment, you must hold the shares you acquired upon exercise of the option for at least:

• Two years from the date you were granted the option, and

• At least one year after the date that you exercised the option

So whether this is something new to you or something you’ve been handling for a long time, feel free to contact us with questions regarding the nuances around Incentive Stock Options.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc.® Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This information does not purport to be a complete description of Incentive Stock Options, this information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing in stocks always involves risk, including the possibility of losing one's entire investment. Specific tax matters should be discussed with a tax professional.

Qualified Charitable Distributions: Giving Money while saving it

Contributed by: Nick Defenthaler, CFP®

Late last year, the Qualified Charitable Distribution (QCD) from IRAs for those over the age of 70 ½ was permanently extended through the Protecting Americans from Tax Hikes (PATH) Act of 2015. Previously, the QCD was constantly being renewed at the 11th hour in late December, making it extremely difficult for clients and financial planners to properly plan throughout the year. If you’re over the age of 70 ½ and give to charity each year, the QCD could potentially make sense for you. 

QCD Refresher

The Qualified Charitable Distribution only applies if you’re at least 70 ½ years old. It essentially allows you to donate your entire Required Minimum Distribution (RMD) directly to a charity and avoid taxation on the dollars coming from your IRA. Normally, any distribution from an IRA is considered ordinary income from a tax perspective, however, by utilizing the QCD the distribution from the IRA is not considered taxable if the dollars go directly to a charity or 501(c)(3) organization.    

Let’s look at an example:

Sandy, let’s say, recently turned 70 ½ in July 2016 – this is the first year she has to take a Required Minimum Distribution (RMD) from her IRA which happens to be $25,000. Sandy is very charitably inclined and on average, gifts nearly $30,000/year to her church. Being that she does not really need the proceeds from her RMD, but has to take it out of her IRA this year, she can have the $25,000 directly transferred to her church either by check or electronic deposit. She would then avoid paying tax on the distribution. Since Sandy is in the 28% tax bracket, this will save her approximately $7,000 in federal taxes!

Rules to Consider

As with any strategy such as the QCD, there are rules and nuances that are important to keep in mind to ensure proper execution:

• Only distributions from a Traditional IRA are permitted for the QCD.

• Employer plans such as a 401k, 403b, Simple IRA or SEP-IRA do not allow for the QCD

• The QCD is permitted within a Roth IRA but this would not make sense from a tax perspective being that Roth IRA withdrawals are tax-free by age 70 ½ *

• Must be 70 ½ at the time the QCD is processed.

• The funds from the QCD must go directly to the charity – the funds cannot go to you as the client first and then out to the charity.

• The amount you can give to charity through the QCD is limited to the amount of your RMD.

• The most you can give to charity through the QCD in a given year is $100,000, even if one’s RMD exceeds that amount.

The QCD can be a powerful way to achieve one’s philanthropic goals while also being tax-efficient. The amount of money saved from being intentional with how you gift funds to charity can potentially keep more money in your pocket, which ultimately means there’s more to give to the organizations you are passionate about. Later this month, we will be hosting an educational webinar on philanthropic giving – click here to learn more and register, we hope to “see” you there!

Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Nick Defenthaler and are not necessarily those of Raymond James. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Are your Medicare Premiums about to Increase?

Contributed by: Nick Defenthaler, CFP®

If you’re like most, chances are you have not heard of what’s known as the “hold harmless” provision set forth under the Social Security Act. To keep things simple, this provision is essentially in place to protect the majority of those on Medicare from seeing jumps in Part B premiums when Social Security benefits do not increase through cost-of-living adjustments (COLA). 

For the second year in a row, due to low inflation, the hold harmless provision is coming into play. This year, there was no COLA for those receiving Social Security and 2017 is projected to only see a minuscule 0.2% bump in benefits. If you’re single and have an adjusted gross income (AGI) below $85,000 or are married and have an AGI below $170,000, your Medicare Part B premiums will not increase – you are part of the group whom the hold harmless provision protects (approximately 70% of those on Medicare). For those with income higher than the thresholds mentioned above, however, (which is approximately 30% of those on Medicare), you will more than likely see yet another increase in your Medicare Part B premiums in 2017 that is currently projected to be approximately 22%.    

It’s also important to note that those who are “sheltered” under the hold harmless provision (AGI below $85,000 for single filers, AGI below $170,000 for married filers) are only those who are currently receiving Social Security benefits. For example, if you’re 66 years old, receiving Social Security benefits and enrolled in Medicare, you will not see a jump in your Part B premium. If you’re currently age 64 but plan on delaying Social Security benefits until age 70, however, there is a very high probability that when you begin Medicare at age 65, your Part B premiums will be higher than they are for current enrollees. 

As mentioned previously, the same situation occurred last year and the actual increases in Medicare Part B premiums ended up being much less than what was initially projected (here’s a link to when I covered the topic last year). In October, we will be hosting a webinar on Medicare and we’re hoping to have more clarity on any potential premium increases at that time. Keep your eyes open for more information surrounding this topic and our October webinar! As always, if you have questions before then, please contact us.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. These hypothetical examples are for illustration purposes only. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Webinar in Review: Cash Balance Plans

Contributed by: Clare Lilek

Here at The Center for Financial Planning, Inc., we host webinars not only for our clients but also for other professionals who we may work with as part of the team to best serve our clients. During these webinars, our CERTIFIED FINANCIAL PLANNERS™ dive into specific topics in greater detail than you might find in a typical blog. In our latest webinar of this kind, Nick Defenthaler, CFP®, with the help of Abram Claude, Head of Value Add Programs Learning Center at Columbia Threadneedle Investments, hosted a 45 minute webinar detailing Cash Balance plans as a way to help business owners potentially accelerate retirement savings and lower taxes.

First, Abram clarified a cash balance plan as one type of defined benefit plan. He detailed the differences between a traditional defined benefit plan versus what the majority of the webinar discussed, a Cash Balance plan. Below you can reference a chart that distinguishes the two:

Typically, Cash Balance plans have been seen as an option only for larger companies, but many smaller businesses have been utilizing this retirement saving strategy because they’re usually easier to manage, they’re not as dependent on interest rate changes, and they offer the same benefit cost for the employer independent of the employee’s age or time with the company, compared to Traditional defined benefit plans.

Here are some questions to ask to determine whether or not a business might be a good fit for a Cash Balance plan:

• Does the business have a consistent, profitable history?

• Will the business have significant and consistent cash flow moving forward?

• Does the business have a budget that can support plan contributions?

• Does the business already maximize its contributions to a defined contribution plan (401k, 403b, etc.)?

• Are there multiple owners or partners?

• Do the business owners or partners want to accelerate their ability to save for retirement and save taxes?

• Is there a low ratio of non-highly compensated employees to highly compensated employees?

• Are the highly compensated employees older than the non-highly compensated employees?

• Is the company relatively small in size (e.g. fewer than 20 eligible employees)

The more “yes,” responses, the greater possibility that a Cash Balance plan might be a good fit for your business or your clients!

For more information, watch the webinar below as Nick and Abram go into the details surrounding the mechanics of these plans, along with helpful examples to illustrate the potential benefits of a Cash Balance plan. If you have any questions after watching the webinar, please feel free to call the office or reach out Nick Defenthaler, CFP®, and we’d be happy to help!

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Clare Lilek and and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Raymond James is not affiliated with and does not endorse the opinions or services of Abraham Claude.

Clare Lilek is a Challenge Detroit Fellow / Client Service Associate at Center for Financial Planning, Inc.

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Raymond James is not affiliated with and does not endorse the opinions or services of Abram Claude and/or Columbia Threadneedle Investments.

Inherited IRA – Learn About Your Choices as a Non-Spouse Beneficiary

Contributed by: Laurie Renchik, CFP®, MBA

During a recent meeting with a client (let’s call her Anne), we discussed the options available to her as the beneficiary of her brother Jim’s IRA. This is an important discussion because there are certain tax benefits that come with inheriting an IRA, but the rules differ depending on whether you are a surviving spouse or what is called a non-spouse beneficiary. In this case Anne is considered a non-spouse beneficiary because she is the sister of the original account owner, Jim.

Here are the options available to Anne:

1. She can rollover the assets directly into an Inherited IRA for her benefit. With this option Anne will take distributions over her lifetime and enjoy the benefits of tax deferred growth.     

2. Anne can take a lump-sum distribution. With this option, there is an immediate tax impact. The value of the distribution is taxed as ordinary income in the year it is withdrawn. Because the IRA is inherited Anne can take the lump sum prior to age 59 ½ and not be subject to the 10% penalty that is usually applied for distributions before age 59 ½. 

3. The third option is that Anne does not have to take the inheritance. She can disclaim all or part of the inherited assets. If this option is chosen the assets pass to the next eligible beneficiaries.  If Anne considers this option she wants to be sure all of the legal requirements are met.

When handled correctly, Anne as a non-spouse beneficiary can enjoy the continued potential for tax-advantaged growth of these assets while avoiding the immediate income taxes.

Our discussion also highlighted some common mistakes to avoid:

1. A non-spouse beneficiary cannot move the inherited IRA into his or her own IRA. An inherited IRA must be kept totally separate from other IRA’s Anne may have and no new contributions can be deposited into the account.

2. Beneficiaries named on an IRA account supersede instructions provided in a will or trust. Since the IRA account information takes precedence it is important to make sure the designated beneficiaries named on the inherited IRA are up to date. 

3. No 60-day rollover. With this rule, you can take a distribution from your own IRA as long as you put the money back in the same account within 60 days, you won’t have to pay income taxes or a penalty. Unfortunately, you can’t do this with inherited IRAs. There is no 60 day rollover rule for inherited IRAs. If you withdraw the money, it’s taxed.

4. If you inherit an IRA, whether it’s traditional or Roth, the IRS requires you take at least some of the account balance each year. It’s called a required minimum distribution and must be taken annually, regardless of your age, beginning the year following the year-of-death of the original account owner. If you don’t take the distribution, the penalty ends up being 50% of the amount you were required to take.

If you are faced with decisions regarding an inherited IRA and have questions feel free to give me a call or send me an email.  I’ll be happy to review your options with you and make sure the choice works in harmony with the rest of your financial plan goals and objectives. 

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered.

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