Mistakes in Estate Planning

No one knows when they are going to die. Most people feel they have ample time to make preparations, but, too often people die prematurely. Here are some typical estates planning errors I have seen in my career.
1) No will or trust.
2) Not updating beneficiaries in the will or trust.
3) Not updating beneficiary designations on IRA/401K or other qualified plans (especially after a death or divorce).
4) Not having a list of usernames, passwords, and answers to “secret questions”. This list needs to be available to spouse or executor of your estate.
5) Not notifying the 3 credit agencies immediately so no one can claim identity of the deceased. Unscrupulous people check obituaries and then try to apply for credit cards in the name of the deceased.
6) Not requesting at least 20 original death certificates with raised seals to unlock insurance benefits, investment accounts, Social Security, Medicare, Medicaid benefits (some people say, but, all my accounts are JTWROS. You still must provide proof of the death).
7) Not preparing for higher automobile insurance rates when one spouse dies (since the risk is higher for only one person).
8) If the deceased was the owner of a credit card and the spouse was a user, then the accounts will be cancelled. Consider having separate cards.
9) Special collectables like guns and sports cars need to have all the paperwork available to sell or transfer the title.
10) Not having an accurate summary of ALL your finances.
The list goes on and on.
Sit with your financial advisor to get started on it today, not tomorrow.

IRA Mistakes on RMD- #3

What happens when a person gets RMD aggregation wrong?
There are two potential penalties when people make RMD aggregation mistakes: the penalty for excess contributions and the penalty for missed RMDs.

RMDs that are rolled over to another retirement plan create an excess contribution in the receiving account, which must be corrected as soon as possible.
When an excess contribution is corrected by October 15 of the year after the year for which the contribution was made, the amount of the excess plus or minus the gains or losses attributable to the amount of excess contribution must be removed from the account as well.
Excess contributions that are not corrected are subject to a penalty of 6% per year for every year they remain in the account. Form 5329 should be filed with the IRA owner’s tax return to report the excess contribution and to calculate the 6%.

When a distribution is taken from the wrong type of account, you have a missed RMD. For example, suppose a person accidentally takes the 403(b) RMD from his IRA. This is against the rules. The person has a missed RMD in the 403(b). The penalty for a missed RMD is a steep one- it is 50% of the amount not taken.

Most people use qualified plans like 401k,403(b) and IRAs to save for retirement, but, the tax traps are so heavy that I do not recommend using them. I share with my clients much better accumulation strategies that provide tax FREE income for life and are not a tax trap like these other vehicles.

IRA Mistakes on RMD #2

IRA Rules
One of the benefits of an IRA is that RMDs for multiple IRA accounts can be aggregated. This includes SEP and Simple IRA accounts. The RMD should be calculated for each account separately, but after that , the RMD amounts can be added together and taken from any one or combination of accounts.

403(b) Accounts
A similar aggregation rule exists for 403(b) accounts. A person with more than one 403(b) account can calculate the RMD for each account and then add the RMDs together. The total amount can then be taken from one or a combination of 403(b) accounts.

Employer Plans
RMDs from employer plans, not including 403(b) plans , SEP, and Simple IRAs, CANNOT be aggregated. A person with multiple 401(k), Government 457(b) or other employer plans must calculate the RMD for each individual plan and take that RMD from that plan only.

Roth IRAs
There is no need to worry about whether Roth IRAs can be consolidated because Roth IRAs have NO RMDs during the account owners lifetime.

Any plan making a series of substantially equal payments over a period of 10 years or more, or over life expectancy, cannot aggregate that payment with the RMD from any other retirement account. The distribution from the account making these substantially equal payments is considered the RMD from that account only.

Next blog will show what happens when you get the aggregation wrong!

IRA Mistakes on RMD- #1 by Paul Ferraresi

RMD or Required Minimum Distribution is the minimum amount you must take from your IRA starting at age 70 1/2. If you do not take the amount , then, you are subject to a 50% penalty tax plus the regular income tax on the amount you did NOT take out!!!

Many people have multiple IRAs. The IRS rules state that you must calculate the RMD for each account separately. Once completed the RMD amounts can be added together. The distribution can be taken in any proportion from one or more of the aggregated accounts.

An RMD cannot be rolled over from any one IRA account to another, and the RMD is considered the first funds distributed from any retirement account during the year.

Say an IRA CD comes due in February, it cannot be moved in its entirety as a 60 day rollover to another retirement account. The RMD amount must be subtracted from the amount that is eventually rolled over.

The same is true for employer plans. All plan distributions are considered rollovers, even when they go directly from one plan to another retirement account.

The 28/36 rule

What is a manageable mortgage payment? A rule of thumb among mortgage lenders is the “28/36″ measure of how much of your total pretax income goes to paying back loans: no more than 28 percent for monthly housing expenses( property taxes, homeowners insurance, homeowner’s dues, and mortgage), and no more than 36 percent for all debt ( car, home, student loans, credit cards). This “debt-to-income” guideline means on a 30 year mortgage of $180,000 at 4.5% will be a payment of $912 and you will need a household income of $52,000 to meet the guideline.

Banks also take into account the “loan to value” ratio of how much of your own money you are putting down. This assumption is that people will be more likely to keep up payments on a home that is worth more than the mortgage. The classic 20 percent down payment. Plus , you now have “skin” in the game.