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.
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 planwhich 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@example.com.