Get an annual IRA checkup

• By Milt x_Zall
• Sep 28, 2001

Whether a self-exam or one conducted by a financial professional, it's a good idea to perform an annual checkup of your individual retirement accounts, according to Dennis Filangeri, a certified financial planner based in San Diego. Here are some key points to consider.

Review investments

You'll want to review how your individual investments are doing within the IRA to see whether it's appropriate to change any. But also review your IRAs in light of the asset allocation of your overall portfolio. Do you have the right mix of stocks, bonds and other investments, especially in the current market decline?

Time to convert to a Roth?

A Roth IRA, whose contributions are made with taxable dollars but whose earnings generally avoid taxation, might be a good move for you, but can you make that move? To convert your existing deductible IRAs to Roths, your modified adjusted gross income must be $100,000 or less for the year of the conversion. An annual checkup, particularly early in the year when you can do some income tax planning, ensures that you won't miss the opportunity if it arises.

Review your beneficiaries

Several factors might incline you to change beneficiaries, such as divorce or the death of a beneficiary. One commonly overlooked reason is if your wealth has increased substantially and your spouse beneficiary no longer needs the IRA money. Then you may want to name a child, grandchild or charity as beneficiary. They can stretch out the IRA assets longer and allow you to preserve your estate-tax exemption rather than "wasting" it by passing everything to your spouse. With the new tax act gradually reducing estate tax rates and increasing the exemption amount, you may want to work with a financial professional on this issue because it gets tricky.

Make sure the IRA custodian has the right beneficiaries

IRA custodians sometimes lose the designated beneficiary forms, or a change of beneficiary for one IRA inadvertently changes the others. If the custodian doesn't have a copy, and you don't either, the beneficiaries would revert to the default of the custodial plan—which might be your estate instead of a named beneficiary. Naming your estate as beneficiary is usually not a good idea.

Look before leaping

Typically, participants in employer-sponsored retirement plans such as 401(k)s roll their plan assets into an IRA when they change employers or retire. This often is the best choice, but you may not want to do that with company stock you're holding in the plan. There may be tax advantages for distributing that company stock into a taxable account, particularly if you are in a higher tax bracket and the stock has appreciated significantly.

Pay attention to when you take your first distribution

You can wait as late as April 1 of the year after you turn 70 1/2 before taking your first annual required minimum withdrawal from your IRA accounts. All subsequent annual withdrawals must be made by Dec. 31 of each year. The problem with this strategy is that you'll end up taking out two minimum withdrawals that first year, and that could bump you into a higher tax bracket or cause Social Security income to be taxable.

Also, some states allow exclusions on IRA distributions, up to a certain dollar limit. Two withdrawals in the same year could cost you that exclusion. An annual checkup might suggest that you take that first withdrawal in the same year you turn 70 1/2.

Be sure you're taking out enough

When making required minimum withdrawals, be sure you're taking out the minimum. Double-check them even if the IRA custodian is calculating them for you. The new IRA distributions rules that the IRS put out early in 2001 make this process much easier because they eliminated a range of confusing withdrawal options. But you can still fail to take out enough, and if you do, you'll pay a 50 percent penalty on the difference between what should have been taken out and what was taken out.

Be sure you can do what you plan to do

You may want to make certain beneficiary changes, but not all IRA custodians allow those changes. An annual checkup of custodial trust documents can reveal any potential roadblocks to your plans that would otherwise be allowable under federal law.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at [email protected].