Don't let Uncle Sam grab your retirement plan
BY TERRY SAVAGE Sun-Times Columnist Mar 4, 2007
Updated: May 3, 2013 12:14PM
How would you feel if you lost nearly half of your retirement money? No, not to another bear market -- but to Uncle Sam! It's a horrifying possibility. But it could happen if you don't pay attention to the rules of your retirement accounts, fail to name the correct beneficiaries to your account, or if your heirs don't understand the proper way to roll over or withdraw your retirement funds after your death.
That scary scenario is the premise of Ed Slott's new book, Your Complete Retirement Planning Road Map (Ballantine, $25.95). Slott is the unquestioned expert on the rules of IRAs and 40l(k) plans as they relate to withdrawals during your lifetime and for the money left over after your death.
Whether it's ordinary precautions, such as naming the correct beneficiary for your IRA, or strategic decisions, such as deciding whether to roll your 40l(k) plan into an IRA when you switch jobs (generally a good idea), or dealing with the complexities of retirement plan assets in divorce, Ed Slott has the advice you need to avoid making expensive mistakes.Don't forget to sign
The most important thing is to make sure you've actually signed a beneficiary form for each retirement account. Next, you need to make a copy of the form you signed with your bank or broker, and leave it with your documents so the account is not overlooked at your death.
Little things that count, and during our conversation, Ed continually reminded me that by the time someone figures out you've made a mistake -- after your death -- it will be too late to do things the correct way.
Step 1: Create an inventory of where all your retirement accounts are stashed, and write it down. This is about more than just account numbers and valuations. Each plan custodian has a different set of rules within IRS legal constraints. Understanding the withdrawal rules, borrowing rules from company plans, and ongoing costs might encourage you to consolidate where appropriate, making life simpler for future withdrawals and for your heirs.
Step 2. Create a checklist of beneficiaries. This is important, he notes, not only after your death, but because it could affect the required minimum distributions you must take during your lifetime -- and thus the amount left to your heirs.
It's important to update this list if your marital status changes or if one of your beneficiaries precedes you in death. The beneficiary document, Ed pointed out, "trumps all other documents, including a will, in determining where the money goes after you die."
Step 3: Check the rules of your company plan or IRA custodian. Some have rigid rules and will not allow lifetime payments to be made to a young beneficiary. Some won't allow the beneficiary to transfer assets to a different custodian. Some won't acknowledge a trust as a beneficiary.
Ed's book covers the new rules that are just going into effect for direct rollovers from company retirement plans to "Inherited IRAs," a specific procedure that must be followed to stretch out the growth and ultimate withdrawals from an IRA that is not inherited by a spouse.
Step 4. Divorce is one of several special situations covered in depth.
"Make a mistake," he says, "and the retirement plan assets will end up taxable to one or the other of the spouses." What most lawyers don't know
Ed explains that a retirement plan can be split in a divorce and retain its tax sheltered status, but most attorneys don't know how to correctly word the division.
If it's a 40l(k) account, the plan must be served with a QDRO (qualified domestic relations order). One tip: The non-employee spouse should then roll his or her portion of the account into an individual IRA, giving more flexibility. Left in a former spouse's plan, distributions might be restricted until your ex-spouse retires!
You worry so much about having "enough" money in retirement, about saving enough, and investing wisely. So don't forget the other end of the process: distributions to your heirs in case your money lasts longer than you do.
Even if you're dealing with a relatively small amount of money, it's worth making the investment in Ed Slott's new book. And that's The Savage Truth.
Terry Savage is a registered investment adviser. Check out Terry's answers to reader questions at suntimes.com, and click on Business.