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Retirement > 401(k)s & IRAs
IRA planning on your own
June 14, 2000: 8:42 a.m. ET

Choose advisers carefully, focus on the long term, and avoid losing gains to taxes
By Ed Slott
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NEW YORK (CNNfn) - If you think you have trouble figuring out confusing IRA tax rules, even the people who claim to be experts are making mistakes that have a devastating long-term tax impact.

"We just don't know the rules," said one broker with a major investment firm.

Banks, brokers and fund companies are presenting themselves as experts on a range of issues from retirement planning to estate planning to gain access to the ever-expanding cash balances in retirement accounts.

Unknowing consumers are falling for the pitch mainly because the advice is free and appears to come from reputable financial institutions. The result is that consumers are making irrevocable tax elections on their retirement accounts based on the advice of a bank, broker or fund company employee with little or no experience in this complex area.

graphicHowever, the long-term losers will be the clients -- and these financial institutions that will most likely be entangled in massive million-dollar malpractice suits from beneficiaries who will be suffering from the improper tax advice their parents received.

The financial institutions will also be big-time losers when they end up losing possibly half of the IRA assets they currently have under management to Uncle Sam due to poor tax planning.

These institutions have not yet focused on the long-term picture, and IRA owners think all is well as long as their IRA accounts keep going up in value -- not realizing that a majority of their IRA gains will be lost to taxes.

Why is this happening? The big investment houses refuse to admit that they do not have enough technically qualified advisers to handle the accounts under management. Even worse, some of these institutions do not know that they don't know the tax rules, yet they spend millions advertising their expertise in this area to the public to bring in even more IRA money and rollovers from company retirement plans.

A little knowledge is dangerous


When banks, brokers or fund companies advise on a client's IRA beneficiary and distribution options, they often do not ask the right questions and use generalizations provided by their institution.

The danger is when these representatives know some basics of estate and retirement tax planning and apply this limited knowledge to each client. Add that lack of knowledge to the consumers' own and you have a dangerous mix of misinformation. The problem is that the mistakes that will have the most serious financial ramifications may not be discovered until years later when the client dies and it's too late to correct them.

The truth is that estate and retirement tax planning is really not the major concern for these financial institutions, but it gets clients in the door. It is being exploited as a "buzzword," a new way to attract clients with big IRA and pension accounts. The expertise for most of these firms is in investment advice, not in tax and legal issues.

As a CPA, I have often been in the unfortunate situation of being the one who must tell the beneficiary that he or she will not be inheriting that $500,000 IRA and may in fact lose over 70 percent of it to taxes, much of which could have been avoided if the parents were given proper tax advice. The first reaction is usually: "How could this happen? My father worked his whole life for this money! I don't understand. The investment adviser told us to do it this way."

What can be done to protect IRAs?


These are tough tax rules. People must seek out true IRA tax advisers who really know this stuff, and there are not that many around. Unfortunately, the first place people turn is the big financial institutions or their attorneys who are rarely qualified in this area. This is all about tax and people need to find tax experts, not financial advisers who say they are just to gain access to your retirement accounts.

You must ask tough questions and then get a second and even third opinion. If you find yourself with conflicting advice you know someone is wrong. The best place to start is with your CPA, who generally does not have a vested interest in who the custodian of your IRA will be. The same could be said for your attorney -- except that attorneys are generally more familiar with the legal aspects of estate planning including wills, trusts and probate issues, but IRAs do not usually pass through any of these legal vehicles and are often ignored in the legal process.

Only as more and more war stories develop will the public become aware of the growing problem. It's called experience, but it's expensive, even though the advice was free. Think about that the next time you call a mutual fund operator for free tax planning advice on your retirement savings. It could be the most expensive call you ever made. Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.