1. Taking the wrong RMD, (Required Minimum Distribution). Sometimes Required Minimum

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1 Top 10 IRA Mistakes 1. Taking the wrong RMD, (Required Minimum Distribution). Sometimes Required Minimum Distributions can be taken from one IRA if there is more than one, instead of taking from all IRA s. Many clients may be taking too much out, but if they are not taking enough, the amount not taken may be subject to a penalty tax of 50% of the amount not received as an RMD. How many people normally have more than one IRA? Most that I work with based on our timelines and risk tolerance have more than one IRA. Short term IRA s for income,(1-5 years of income for low risk investing) to longer term IRA s for growth to replace the income IRA eventually within a 1-5 year period.( i.e. $1000*60 months is $60k without an interest or gain.) In this case the $1000 per month needs to be replaced in 5 years so a present value or current deposit needed at say 5% would need to grow to 60k in 5 years would be $47, How common is the problem of people taking money from multiple IRAs when taking from one is better? When my clients really understand my process it makes sense, but many people that don t have proper planning just take what the custodian of the IRA sends to them on their statement. This one of those automatic things that gets redone every year. These people did no real planning, not coordinated with dialed in future value expectations of the account. This in the past, could be considered laddering of short term CD s at low interest rates with longer term CD s at a higher rate, except we rely all types of solutions that have predictable future values such as annuities, equity linked CD s or asset allocation of portfolios that have certain return expectations. How many financial planners screw this up? I am not sure how many screw this up, but we could look into penalties and case law for people that have had large penalties which would tell how this happened and how the IRS triggered the penalty. All planners should know this, since they could be sued if the client gets penalized. In the past the IRS initially offered a one - time waiver, now they are tightening things to disallow the waiver or any excuse. So clients will look to their planner for compensation. Can you set up an example of two retired investors, each with multiple IRAs and one takes distribution from one and the other from all the IRAs, and show the differences? Yes, will get to that when we speak. I know it s the law that you must start taking out money from your IRA at a certain age, but how did this law come about? What s the reasoning behind it? Reasoning is the IRS and congress knew the baby boomers were going to cost bucks in the form of benefits obligations from the government in the form of Medicare to Social Security and other entitlements. Congress pretty much told everybody to get an IRA for retirement and more importantly, a tax deduction which became part of a total financial plan. A big consideration for the tax deduction is that they (IRA holders) were going to be in a high tax bracket during their working years and a low tax bracket when they retire. Now, when someone turns 70 1/2 the IRS wants their money, the total tax could be higher than the IRA holder can imagine. Mainly, because the additional income on the tax return, could trigger an additional tax on their Social Security income, in some cases wiping out most of their net social security income.

2 I can demonstrate this. This is why in advance of retiring my clients build 4 income spigots to turn on at various times and in various amounts. The reasoning is we are taking income based on tax law, some income will be 100% taxable (IRA s, 401k s, and some annuities) some not taxable (ROTH IRA s if held for 5 years or taken after 59 ½ years old), others are tax free (Investment income is not reported on a federal tax return, withdrawals can be free of federal taxes), such as municipal bonds, immediate annuities (non qualified immediate annuities are partially taxable, using what we call an exclusion ratio), etc. and we determine that reducing their tax bite by 33% is a lot easier to do than try to achieve that in some sort of investment return. 2. Not taking advantage of the stretch distribution option or not establishing it properly. Problem could be your current custodian does not allow for the stretch IRA.(Many do not offer the stretch, check with your custodian. The "Stretch IRA" is a way for non-spouse IRA beneficiaries to maximize payouts from the IRA over their entire life expectancy. Properly designating beneficiaries and informing them of the IRA owner's "stretch" intentions are keys to making this strategy work. What is a non-spouse IRA beneficiary? Is this something that applies only if the IRA holder dies or can t make withdrawals himself/herself? When do non-spouse beneficiary situations come up? It applies when the IRA holder dies, naming a child or grandchild if they do not have or want to name a spouse due to many considerations, one being estate tax planning. What is the advantage of a stretch beneficiary option? How are payouts maximized? The advantage of the stretch is to create a lifetime creditor proof income based on the life expectancy of the beneficiary. This is shown in tables we are required to use by the IRS. Payments are maximized when they are stretched over the beneficiary s life and only when the beneficiary takes a required amount even though they have the option of taking it all in one lump sum. The lump sum creates a large tax liability for the beneficiary. Sometimes custodians have a 5 year payout option that becomes fixed once elected. 3. The IRD designation allows beneficiaries to take an income tax deduction for any estate taxes paid on the IRA's assets, thus limiting double taxation of the IRA assets. Some beneficiaries not taking advantage of the IRD. At death, IRAs are included in the IRA owner's estate, creating an estate tax liability (if applicable) as well as an income tax liability for beneficiaries. Many IRA beneficiaries don't realize that IRA s are considered "Income with Respect to a Decedent" (IRD) according to Section 691(c) of the IRS code. What is IRD? An income that could be deducted on the tax return of the estate. How common is it for people to pay double taxation? Very common since most tax people are not aware of this deduction. Do most financial planners screw this up? Very rarely does it come up, but it is a critical part of the discussion. Financial advisors screw up by not asking questions regarding income tax returns, total estate value and the relationship of the heirs to the account holder.

3 4. Making the mistake that you should have a spousal rollover at the death of the first spouse. Most IRA s list the owner's spouse as the primary beneficiary, and one of the means of simplifying an IRA holders financial life is for a spousal beneficiary is to simply roll that IRA into the surviving spouse's own IRA. But it can be more tax efficient for a surviving spouse to leave the IRA in the owner's name or disclaim the assets thereby allowing them to pass to the contingent beneficiary. What are the specific advantages of not rolling over to spouse? This strategy reduces total estate value of the spouse for estate tax purposes. If spouse is under 59 ½ he or she can take the income without incurring a 10% early withdrawal penalty. This is a consideration when the deceased spouse is older and the income needs of the surviving spouse are insufficient. How common is this? This should be considered since many blindly rollover the IRA to the surviving spouse. When is this decision made? How is it overlooked? How do most financial planners handle it? The decision is made during the claim process, this is overlooked way too often. Many financial planners blindly roll without this consideration. 5. Many times we see IRA holders missing important dates. Estate taxes, if applicable, will be due nine months after the IRA owner's death. The same deadline applies to beneficiaries who wish to disclaim IRA assets. By September 30th of the year following the year of the owner's death, the beneficiary whose life expectancy will control the payout period must be determined. And, generally, IRA beneficiaries must begin taking required distributions by December 31st of that same year to avoid IRS penalties. Who misses these dates, the individual or the financial planner? For that matter, regarding all this IRA stuff, how many people do this on their own versus depend on a financial planner? The individual will most likely miss these dates. Most people rely on a planner, or a person at the bank. Not sure who would do this on their own without help from a professional. 6. Adding a Trust as owner of the IRA. Changing the actual ownership of the IRA to a trust causes immediate taxation, including the 10% penalty tax if the IRA holder is under age 59 1/2. What are advantages and disadvantages of this? A Trust/Trustee has the ability to change owner and the beneficiary. How often is this an issue? After checking the beneficiary designation on the IRA application we are constantly surprised at who is the primary and contingent beneficiary after asking the IRA holder who they think those beneficiaries are. How do you avoid the taxation? Is it avoidable? Is it still worth getting taxed in some or most situations? Immediate taxation is avoidable, depending on the tax bracket and pending tax legislation it may make sense to pay the tax all at once. The thinking at the time may be now is better than later based on a trial tax return being run.

4 7. Proper updating of beneficiaries. One of the most common mistakes made by IRA owners is either not listing a beneficiary, which may result in distribution of the IRA assets to the IRA owner's estate, or not updating the beneficiary designations and coordinating them with other estate planning documents. How does this mistake get made? Where in the process do you normally make this decision? How is it missed? This decision is made most of the time by the individual who either fills out the IRA application themselves or with the person at the bank. Upon setting up the IRA is when the mistake is made. Not updating for changes in life and relationships, this is where an ex-spouse can inherit and there is nothing that can be done contract law applies to beneficiaries. What are some negative scenarios when this occurs? When you are remarried or divorced an IRA holder should make the needed changes. It makes sense to double check the contingent beneficiary as well. 8. Paying unnecessary penalties on early (pre-age 59 1/2) IRA distributions. As long as withdrawals are made in accordance with the requirements of Section 72(t) calling for "a series of substantially equal periodic payments," there is no need to pay penalties on distributions from IRA s before the owner is age 59 1/2. Three calculation methods give IRA owners flexibility to take out the amount that is right for them. What are the requirements in Section 72(t)? What are the calculation methods? Is there guidance on this exception? Yes. Rev. Rul lists three methods you may use in determining what are substantially equal periodic payments: 1. the required minimum distribution method, 2. the amortization method, and 3. the annuitization method. All three methods require the use of a life expectancy or mortality table. The second and third methods require you to specify an acceptable interest rate. 9. Many people assume a nonworking spouse cannot contribute. The truth is that separate "spousal" IRAs may be established for spouses with little or no income up to the same limits as the working spouse. This takes a review of your income tax return with a competent professional to make sure you are eligible for the deduction. As of 2013 the phase out limit for a spousal IRA is $188,000 of AGI. What are the advantages of having a non-working spouse open an IRA? You get a tax deduction and tax deferred growth for future income after the accumulation period. Why do people assume they are not able to make a spousal contribution? I would assume, as long as you have the money and are within the AGI guidelines, (regardless whether you re working or not) you can open a Spousal IRA and contribute. Is AGI Adjusted Gross Income??

5 Yes, Adjusted Gross Income. Adjusted Gross Income is defined as gross income minus adjustments to income. We suggest you refer to your 2012 federal income tax return to get a quick estimate of your 2013 AGI. On your 2012 return, please refer to: Line 4 if you filed a Form 1040EZ Line 21 if you filed a Form 1040A Line 37 if you filed a Form Not taking advantage of increased contribution limits. In 2013, IRA contribution limits are $5500 for individuals under age 50 and $6500 for individuals over age 50. Why don t people take advantage of it? Is it because they don t know the limits? Most people who do their own tax return themselves and have little or no tax planning training. The ones that do not make the full amount typically do not have the additional funds or are unable to find funds that can be put away for the long haul. Also, there are limitations based on income and if they already have a retirement plan at work. Sometimes we can make spousal IRA contributions for husbands or wives that do not have a plan or do not work for income. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.