10 common IRA mistakes

Transcription

1 10 common mistakes Help protect your valuable retirement assets Not FDIC Insured May Lose Value No Bank Guarantee Not Insured by Any Government Agency

2 You ve worked hard to build your retirement assets so let them continue to work hard for you throughout your working career, your retirement years and then for your family and heirs after that. s provide a wonderful savings opportunity, with lots of benefits and flexibility, but those benefits come with certain rules and regulations that you need to keep in mind. With this workbook, John Hancock helps highlight some of the most common mistakes that people make with their s, so that you can learn to avoid them. Write down any questions you may have and call your financial professional to schedule a follow-up meeting.

3 10 common ira mistakes 1. Making common rollover mistakes 2. Not considering a Roth 3. Forgetting catch-up contributions 4. Failing to name a beneficiary 5. Having an outdated beneficiary 6. Naming a trust as a beneficiary 7. Not knowing your distribution options regarding inherited s 8. Overlooking income tax deductions, such as IRD, with inherited s 9. Not cleaning up old retirement accounts 10. Trying to do it by yourself

4 Mistake #1 Making common rollover mistakes You have 60 days to put rollover money into an or risk losing the tax deferred status of the investment. There are two types of rollovers: INDIRECT and DIRECT, or trustee to trustee. An INDIRECT rollover is when you take a check made payable to yourself and then deposit it into another. An indirect rollover can only be done once per year and must be done within 60 days of the original distribution. If you fail to complete the rollover within 60 days, you will have to pay taxes on the distribution. A direct rollover is when a financial institution ( custodian or retirement plan trustee) issues payment directly to another financial institution. As long as the check is payable to the financial institution for your benefit it is considered a direct rollover. Indirect: On January 1, you request a $100,000 rollover from your qualified retirement plan. A 20% mandatory tax is withheld. The 60-day time limit begins! January 1 March 1 the Following year When you have the choice, go with a direct rollover or transfer. The reason is simple: When amounts from a qualified plan are transferred directly between financial institutions, there is no 20% mandatory tax withholding and no 60-day window to be missed. You receive $80,000 you add $20,000 of your own money $100,000 should be rolled over within 60 days or you will owe taxes on amount withheld IRS receives On or before March 1... IRS $20,000 your custodian IRS $20,000 must receive your A refund for the tax withholding can be requested in the next Mandatory tax withholding for withdrawing $100,000 tax year if the rollover was rollover from a qualified retirement plan completed within 60 days 1 direct: On January 1, you request a $100,000 rollover from your qualified retirement plan to your custodian. + $100,000 goes directly from your qualified retirement plan to your custodian with no mandatory tax withholding When qualified plan money is transferred directly between financial institutions, it is a direct rollover there is no mandatory tax withholding and no 60-day window to be missed. Hypothetical examples for illustrative purposes only. Please note that indirect to rollovers would require a 10% withholding while direct to rollovers would not. If you are over age 70½ and rolling over assets from one financial institution to another, make sure that you have taken that year s Required Minimum Distribution (RMD) prior to the transaction. Current-year RMDs are not eligible for rollovers. Important: If you want to move an inherited and maintain tax deferral, it must be done by way of a direct or trustee-to-trustee transfer. If you inherit an, an indirect rollover is not an option. 1 Based on your own tax situation, you may receive more or less than the taxes withheld.

5 Not considering a Roth Mistake #2 You may not realize that Roth conversions are now available to everyone, regardless of income. Unlike traditional s, which are usually funded with pre-tax dollars, only after tax earnings can go into a Roth. As long as you have held your Roth for five years and reached age 59½, the growth in your account is distributed tax free to you. There are four ways to put money into a Roth : 1 Contributions Roth contributions are limited to $5,500 per year (plus a $1,000 catch up if you are 50 or older), and can only be made by people whose income falls under a certain amount. 2 2 Conversions Roth conversions are now available to everyone, regardless of income level. Prior to 2010, only people with an adjusted gross income (AGI) of less than $100,000 could convert. This meant that many people could not even consider a Roth. Keep in mind that when you convert an to a Roth, you have to pay taxes on the taxable amount of the at the time of conversion. This can be expensive and should only be done after careful evaluation. 3 Roth 401(k) Contributions Roth 401(k)s have distinct rules. They allow a participant to contribute up to $17,500 ($23,000 if age 50 or older) into a designated Roth account. Unlike a traditional 401(k), there is no pre-tax benefit contributions to Roth 401(k)s are included in your taxable income. However, once in your designated Roth account, your savings grow tax-free, as long as you follow Roth distribution rules. Before making a decision, consider a Roth for its potential tax-free income in retirement and positive wealth transfer attributes. 4 new! In-Plan Roth Rollovers The American Taxpayer Relief Act lifts most in-plan Roth rollover restrictions. Participants in 401(k) plans with in-plan Roth conversion features can convert assets to a Roth account without a distributable event, such as termination of service. (As with other conversions, the amount is subject to income tax.) Roth s have a number of attractive benefits. Not only do they offer the possibility of tax-free income in retirement, but they can also be powerful wealth transfer tools. Unlike a traditional, Roth s do not require owners to take a required minimum distribution (RMD) each year. Another potential advantage is that they pass on tax-free to beneficiaries. 2 Please note that for married couples filing jointly, contributions are phased out between $178,000 and $188,000 of adjusted gross income.

6 Mistake #3 Forgetting catch-up contributions By not fully utilizing catch-up contributions, you may not be maximizing your retirement savings. Once you turn 50 years old, the IRS lets you kick your retirement savings into high gear. Catch-up contributions allow you to increase annual contributions to your retirement account. For traditional s or Roth s, you can add an additional $1,000 per year to your account, which increases your total annual contribution from $5,500 to $6,500. Remember that catch-up contributions are also available for most employer-based retirement savings accounts, so be sure to consider all of your options! Catch-up contribution limits If you are 50 or older, try to take advantage of the catch-up contributions each year. Catch-Up Amount Contribution Amount 3 Total Traditional or Roth $1,000 $5,500 $6,500 Simple $2,500 $12,000 $14, (k) $5,500 $17,500 $23,000 Solo 401(k) $5,500 $51,000 $56,500 For 401(k) plans, the catch-up contribution is $5,500. If you are over age 50, you can defer up to $23,000 into your 401(k) account. If your plan allows a Roth 401(k), you may be able to defer the full $23,000 into your account. If you own a business, catch-up contributions make a Solo 401(k) plan a compelling option. A Solo 401(k) plan has both employee deferral and profit-sharing components. As a result, a Solo 401(k) offers a sole proprietor, who is age 50 or older, the opportunity to defer as much as $56,500 from current taxes. Please note that Solo 401(k)s are limited to owners of a business with no employees other than a spouse. 3 For 2013 and beyond, these amounts will be indexed for inflation. Please check for current contribution limits.

7 Failing to name a beneficiary Mistake #4 If you lack a named beneficiary or name an estate as a beneficiary, it may lead to several problems: accelerated distributions, loss of the stretch option and the potential for probate. Whatever happens, don t make this mistake! s do not have to be passed on by a will; rather, they pass on according to the terms of the s Beneficiary Designation Form. This is why the Beneficiary Designation Form could be one of your most important estate planning documents. Unfortunately, this form is often overlooked or neglected. If you don t name a beneficiary, what happens to your? The default beneficiary will generally be your estate. This will most likely result in a loss of both the stretch option and spousal continuation. This requires distributions from the be made as a lump sum or within five years after your death. 4 The will be subject to probate. Probate can be a costly, time-consuming, public process that may be avoided simply by ensuring that your Beneficiary Designation Form is properly completed. The income tax rate may be higher when s are paid to an estate rather than to individual beneficiaries. To save money and time and to maintain the stretch potential, an owner should name individuals as beneficiaries and designate contingent beneficiaries. In the event the primary beneficiary dies before the owner, the assets do not pass on to the estate or fall into probate. Instead, they pass on to the contingent beneficiary. 4 If the owner was over age 70½ when he/she passed away, the estate may continue taking distributions over the remaining life expectancy of the original owner.

8 Mistake #5 Having an outdated beneficiary You may make distributions to unintended beneficiaries. It s important to know that when an owner dies, the assets pass directly to the designated beneficiary, and this typically happens quickly because the lengthy probate process is avoided. This makes it essential that beneficiary designations are accurate and up to date. Whoever is named on an Beneficiary Form is entitled to receive the assets. owners should review their beneficiaries at least once a year or when a significant life event occurs. This includes the birth or adoption of a child, a marriage, a divorce and the death of a family member. Remember, in most cases, if an exspouse remains the designated beneficiary, he or she will inherit that upon the death of the owner. Changing a beneficiary designation on an is simple you just complete a new Beneficiary Form and mail it to the custodian. Ensure that the people you want to receive your will get it by undertaking an annual review of your Beneficiary Forms and making sure they are up to date and accurate. Another important point: If grandchildren are named as beneficiaries, make sure the value of the (and any other assets) that s passing on to them does not exceed the applicable generation-skipping transfer tax exemption amount ($5.25 million for 2013). If this happens, additional taxes may be due. Also, remember that if naming a minor as a beneficiary, it is important that you do not name the minor directly. Instead, you should name a custodian for those assets pursuant to your state s transfer to minors act. Minors have no legal capacity to claim assets on their own. And of course, when the child reaches the age of majority, you ll want to make sure you update your Beneficiary Forms again. Primary Beneficiary Contingent Beneficiary Last Updated Are you missing any accounts, beneficiaries or forms? If so, ask your financial professional for the Beneficiary Forms you need and then regularly review and update your accounts. It s easy to take control of your financial future!

9 Naming a trust as a beneficiary Mistake #6 Naming trusts as beneficiaries of s may become a tax trap. Estate planning attorneys frequently use trusts as beneficiaries of s. However, if the trust is not structured properly and does not qualify as a look-through trust, the assets will most likely have to be paid out within five years after the owner dies. This eliminates the stretch option for beneficiaries and results in immediate taxation. Look-through trusts When the only beneficiaries of a trust are people (not charities or organizations, for example), the IRS permits stretching distributions from the to the trust based on the life expectancy of the oldest trust beneficiary. This is known as looking through the trust. Still, with a look-through trust you have to be careful. If one trust beneficiary is significantly older than the rest (for example, a surviving spouse), a relatively rapid payout may still occur. Be aware that naming a trust as beneficiary of an may result in additional taxes. Taxable income received by a trust may be subject to the highest income tax rates imposed by the IRS, which is 39.6% in 2013, for all income in excess of $11,950. Roth conversions There is a compelling option for you to consider. A Roth can be a better fit when naming a trust as a beneficiary. Although the distribution rules are the same, the distributions that flow into the trust from a Roth are tax-free. If the owner s goal is to use the trust as a way to accumulate distributions and pay them out gradually to beneficiaries, converting to a Roth and leaving the Roth to the trust can make sense. When leaving assets to a trust, find out if the trust qualifies as a look-through trust, and talk to your financial professional about whether converting the to a Roth makes sense.

10 Mistake #7 Not knowing your distribution options regarding inherited s Significant planning opportunities may be missed when spousal continuation occurs before all options are considered. Your distribution options will vary depending on your relationship to the person from whom you inherit an. Spouses have great flexibility when inheriting an or a qualified plan from a deceased spouse. However, with proper planning, if you inherit an account from someone other than your spouse, such as a parent, you can still defer taxation over many years. Spousal mistakes to avoid Surviving spouses have the option of treating their deceased spouses s as their own or rolling the assets into their own s. However, surviving spouses should first be aware of all their options. When might a surviving spouse choose not to treat the as his/her own? Talk to your beneficiaries before they receive an inheritance and make sure they know the importance of considering all possible distribution options. 1 If the surviving spouse is under age 59½ and wants income, there is no 10% penalty on distributions from an that remains in the deceased spouse s name. 2 If the surviving spouse is older than age 70½, doesn t need income immediately and his/her late spouse was younger than 70½, the surviving spouse may wish to keep the in the late spouse s name. This allows the surviving spouse to delay distributions from the until the deceased spouse would have turned age 70½. 3 If the applicable federal estate tax exemption has not been fully used, the surviving spouse may want to disclaim rights to a portion of the, up to the amount of the applicable exemption. Non-spousal mistakes to avoid Beneficiaries often liquidate their inherited too quickly, resulting in immediate income taxes that must be paid. A stretch plan can help pass assets to beneficiaries by providing the following advantages: The beneficiaries tax liabilities are spread over their lifetimes. The undistributed assets will continue to be invested in a tax-deferred manner, even as withdrawals are being taken. Additional assets can be accessed when needed.

11 Overlooking income tax deductions, such as IRD, with inherited s Mistake #8 Beneficiaries of s often miss potentially large income tax deductions, such as those related to IRD. Even though s are considered to be income in respect of a decedent (IRD), they are generally included as part of the owner s estate for federal estate tax purposes. When estate taxes are paid based on IRD, the beneficiary may have a right to take an income tax deduction equal to the amount of estate taxes attributable to the IRD. This is deductible as a miscellaneous itemized deduction on the beneficiary s Schedule A of his/her personal tax return. 5 The deduction could be quite large so be sure that it s not overlooked. Hypothetical example of the impact of an IRD income tax deduction without IRD Income Tax Deduction Owner dies with an worth $1,000,000 Estate tax attributable to the $400,000 Beneficiary receives $1,000,000 Taxable portion of the $1,000,000 Beneficiary is in the 39.6% tax bracket x Potential tax on a $1,000,000 $396,000 with IRD Income Tax Deduction Owner dies with an worth $1,000,000 Estate tax attributable to the $400,000 Beneficiary receives $1,000,000 IRD deduction 5 $400,000 If you inherit an, consider the simple question, Did the estate owe estate taxes? If the answer is yes, then the deduction for income in respect of a decedent (IRD) may be available. To further maximize your tax savings, introduce your financial professional and your tax professional to each other. Taxable portion of the $600,000 Beneficiary is in the 39.6% tax bracket x Potential tax on a $1,000,000 $237,600 Potential savings with an IRD deduction $158,400 This example is purely hypothetical and is shown merely for illustration. 5 IRD is fully deducted as a miscellaneous itemized deduction but is not subject to the 2% of AGI limits normally associated with this deduction.

12 Mistake #9 Not cleaning up old retirement accounts Having too many old retirement accounts is an easy way to make mistakes, such as missed RMDs. While there are no rules regarding how many retirement accounts a person can have, trying to manage multiple accounts can lead to unnecessary complications and potential mistakes. For example, having multiple s or old 401(k)s can result in complicated recordkeeping, asset allocation mistakes and inconsistent or contradictory beneficiary designations. These are all good reasons to consider consolidating your retirement accounts. Another concern with old 401(k) accounts is that they may have rules regarding distributions that are not present with s. For example, a 401(k) account may require your spouse s signature in order to leave the account to children. Some 401(k) administrators also impose restrictions on post-death distributions and this is a limitation that you will most likely want to avoid. Consolidating multiple retirement accounts into a single can help you avoid overlooking important details and can dramatically simplify your life. Finally, recordkeepers are required to issue a FORM 5498 for all retirement accounts. One item noted on the form is whether a RMD is due. Having to keep track of multiple forms could increase the likelihood of a missed RMD. Failure to take a RMD can result in a penalty of 50% of the amount that should have been taken.

13 Trying to do it by yourself Mistake #10 Don t go it alone. In this Internet age, there are plenty of do it yourself opportunities when it comes to managing your finances. However, there can be enormous consequences if you make a mistake. Do you really have the knowledge, time and desire to tackle it alone? If you re like most people, you need someone to help you set long-term goals and plan for the future. Here are some of the types of financial professionals who are most commonly used to help develop a well-rounded retirement plan. Financial advisors and planners Also called brokers, financial planners, investment counselors and registered representatives, these professionals can typically help you map out a long-term plan. They offer a wide range of products (mutual funds, annuities, separately managed accounts, stocks and bonds), services (advice, asset allocation and rebalancing) and knowledge (retirement and estate planning). Insurance planners They help people protect their loved ones and guard against unexpected occurrences through a range of insurance products, including life, disability and long-term care insurance. Accountants You may think of your certified public accountant (CPA) as someone who advises you on only tax issues, but some CPAs can also help you with investments and estate planning. Attorneys They are called upon for a wide range of services, from setting up a will or a trust for a family to serving as executor to filing papers for probate. Don t be afraid to seek assistance and guidance from a financial professional. He /she has the experience to help you make the best decisions based on your individual needs, preferences and goals. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state and local tax penalties.

14 What s next? Review retirement assets and beneficiary information Retirement assets at a glance Type of Account Company/ Custodian Account Number Current Value Primary Beneficiary Contingent Beneficiary Roth Roth SEP SIMPLE 403(b) 401(k) 457 Other Other Information current as of / / At John Hancock, we believe that seeking expert help and establishing a relationship with a financial professional is the best way to secure the kind of life you want to live. A financial professional can help you: Clarify your investment goals Establish a financial plan Regularly reevaluate goals and progress Remain disciplined Review beneficiary designations

15 We wish you much success as you take steps toward securing your financial future.

16 This material was prepared to support the promotion and marketing of John Hancock products. John Hancock, its distributors, and their respective representatives do not provide tax, accounting, investment, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, investment, or legal statements made herein. A fund s investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the fund. To obtain a prospectus, contact your financial professional, call John Hancock Investments at , or visit our website at jhinvestments.com. Please read the prospectus carefully before investing or sending money. John Hancock Funds, LLC Member FINRA, SIPC 601 Congress Street Boston, MA jhinvestments.com Not FDIC insured. May lose value. no bank guarantee. not insured by any government agency. BB10MISBR 8/13