NEW YORK (CNNfn) - Attention IRA owners: Start planning now because a retirement time bomb is ticking. |
Most IRA owners are clueless and happy. The stock market has pumped up their retirement accounts to such healthy levels that many assume they'll have a worry-free retirement.
The sad truth is that 70% to 80 % or more of the trillions in IRA assets will go directly to Uncle Sam, simply because people have done nothing to protect their accounts from the double and sometimes triple taxation that will occur when they die.
Where did all this IRA money come from and why is this a problem now? Most people have accumulated thousands of dollars from the pensions, 401(k)s, 403(b)s, Keoghs and other retirement plans at the companies where they worked for 20, 30 or 40 years.
When they retired, they rolled their plans over to IRAs. Then the stock market took off and made IRA millionaires out of people who never imagined this kind of wealth in their retirement accounts. So they're thrilled.
But instead of taking steps to protect this nest egg, most just sit back and look at their IRA statements, thinking that this money will just keep growing and eventually be passed on to their beneficiaries when they die.
It will pass on to their heirs, but the biggest beneficiary will be the U. S. Treasury, grabbing an average of 70% or more, depending on the size of the account and on how soon after death the IRA will have to be distributed due to poor tax planning. The combination of federal estate tax, federal income tax, state estate tax and state income tax leaves little for heirs.
If this is such a big problem, why aren't we hearing from IRA beneficiaries who have lost their inherited IRAs to the IRS? The reason is that IRAs are relatively new. They are only 25 years old and most people with large IRAs are still alive.
But that will change in the next decade, and when it does, IRA beneficiaries will wish their benefactors had done more planning. They will also be running to lawyers wondering who they can sue for incompetence. The incompetence though, is on the part of the IRA owners.
What can be done now? Get competent tax advice! The IRA tax rules are extremely complex and often unforgiving. This is not an area for do-it-yourselfers or advisers who may be practicing on you.
You'll need an IRA tax expert and you'll have to pay for the advice. Unfortunately, the first thing IRA owners think, is "Hey, I have my IRA with a big bank, broker or mutual fund company. Why should I pay an adviser if I can call any one of these IRA institutions and get IRA advice for free?" "They must know all the rules. I'm sure they are looking out for me."
IRA tax expert Barry C. Picker, a CPA from Brooklyn, N.Y., said he hears this argument from people every day.
"The financial institutions are more clueless than you are" Picker said. "When this kind of important tax advice is offered at no cost, it minimizes the value of such services and gives IRA owners the feeling that this is not that important."
These institutions are generally investment advisers and not tax consultants. Look at the microscopic wording at the bottom of their ads. It says that they are not tax or legal advisers, but that doesn't stop them from having an inexperienced but helpful clerk answer your IRA questions for free. You can always get free advice, but that will cost your beneficiaries their inheritance.
You should immediately ask your IRA tax specialist to plan the distribution and beneficiary options for your IRA. If this is neglected, your IRA tax elections will be made for you and they are generally the least favorable choices. Picker, author of "IRAs at 70-1/2," advises people to make these decisions by your Required Beginning Date (RBD), or the date when you have to start withdrawing from your IRA according to the law.
For an IRA owner, the RBD is April 1 of the year following the year you turn 70-1/2 years old. So if you turned 70-1/2 anytime in 1999, your RBD is April 1, and your IRA decisions must be made by then.
Even if you are not yet near 70-1/2, if you have built up substantial IRA or pension assets, you need to do IRA distribution planning, which means estate and income tax planning for your retirement accounts. They key items to address in the planning process are:
1. Make sure that you have properly filled out beneficiary forms for all your IRAs and other retirement accounts.
2. Plan the tax impact of choosing the proper beneficiary and the right distribution method for each IRA.
3. Make sure that your IRA distribution planning is coordinated with your overall estate plan.
4. Make sure you have the right tax and legal advisers working together for your benefit. You'll pay for this kind of high quality advice, but the cost will be nothing compared to the cost of neglect.
The truth is that you, as the IRA owner, will never live to see the mistake you have made, but your beneficiaries will, and they will wonder about it for the rest of their lives.
Ed Slott, a CPA from Rockville Centre, N.Y., is a leading expert on IRAs and tax issues. He is also author of "Ed Slott's IRA Advisor".