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Retirement Planning Strategies: 7 Year-End Mistakes to Avoid

As we approach the end of 2018, advisors of all disciplines have the special opportunity to remind clients of their value by showing that they understand their client’s personal situation. This is especially true for retirement and tax planning strategists. It’s easy for clients to feel lost, make poor decisions, and suffer major consequences if advisors are not watching out for them. Some common mistakes include: required minimum distributions (RMDs), Stretch IRAs, Roth conversions, and IRA deadlines.

Advisors can show their added value by focusing on these seven specific topics:

  1. Required Minimum distributions (RMDs).

    While this annual IRA ritual is well known among financial advisors, it’s just as common to miss distributions or deal with computational errors. Remember, clients who don’t take their required minimums will get hit with a hefty 50% penalty on any distribution amounts they should have taken. This fee in some special circumstances could be waived by the IRS, but why add stress to you or your client.

    Advisors should be aware of every client who is or will be subject to RMDs by the end of the year. Most have the experience with regular clients who are over 70½ years old and are taking their RMDs annually. Even though it’s not obvious, you will have clients who sneak up as newcomers to the 70½ club or sophomores who might need to take two RMDs this year (their first and second) and required distributions for IRAs or Roth IRAs that they inherited (these include trusts that are IRA beneficiaries). Roth 401(k) plans are also subject to required minimum payouts (Roth IRAs owners are not). This is an important conversation to have with clients if a Rollover is appropriate.

  2. Qualified charitable distributions.

    The Tax Cuts and Jobs Act of 2017 provided help for taxpayers through an expansion of standard deductions. That being said, clients who do not itemize their deductions will no longer be able to deduct their charitable contributions. If any of your clients have IRAs subject to RMDs, it’s not too late to contact them and suggest the qualified charitable distributions (QCD) provision. They should also consider making their contributions directly from their IRA.

    The amount your client contributes will count towards their RMD amount and be excluded from income. This creates an “effective” tax deduction on top of the standard deduction. The QCD only applies to IRAs—not plans and IRA owners or beneficiaries who are at least 70½ years old. Donor-advised funds and private foundations are not eligible for the qualified charitable distribution and nothing is given in return for the gift. The annual limit per person is $100,000.

    When contemplating a one-time large donation, clients can still do the QCD even though the gift might exceed the RMD amount, so long as the amount is below the $100,000 limit. Giving more than the RMD removes more IRA funds that will then not fall under income and might even lower the RMD amount for the next year. QCDs will lower adjusted gross income, which may help you with other tax benefits or deductions. Qualified charitable deductions lower tax bills and must be completed before year’s end in order to count for the same tax year.

  3. Roth conversions.

    The biggest change for IRA planning affected Roth conversions. As of January 1, 2018, conversions are no longer allowed to be reversed. They are permanent and taxes will be due as soon as the funds are converted. Roth conversions are still valuable for certain clients, but going forward, conversions need to be carefully and accurately thought through. In order to qualify for a Roth conversion this year, the funds must leave the IRA or plan by year’s end. Some people confuse Roth conversions deadline (year’s end) with Roth IRA contributions which can be made until April 15th of next year.

    Other tax changes should become a factor when projecting the tax on a Roth conversion. This is in addition to the usual items like taxability of Social Security, increases in Medicare Part B and D premiums, student financial aid eligibility, to name a few. Also, be aware that some clients will lose state tax deductions (the cap is now $10,000, also known as SALT) and the increased standard deduction might not make up the difference. All 2% miscellaneous deductions are also gone.

    For business clients, the new 20% deduction for qualified business income (the section 199A deduction) and the effect a Roth conversion should be reviewed carefully. While some might think these are reasons to avoid a Roth conversion, when looking at long-term financial and tax planning strategies, they are short-term bumps as the additional taxes would only be for the year in which conversion takes place. These issues should be considered carefully, Roth conversions no longer can be undone.

  4. Check estimated taxes on RMDs.

    Double check to make sure any clients that are new to RMDs had enough money withheld or paid in through estimated tax payments to avoid any penalties. If they did come up short, it might be a good idea to withhold taxes from year-end IRA distributions. This would help satisfy the estimated tax payment timing requirement.

    Add this item to your end-of-the-year checklist for clients with RMDs. Some of our clients will even withhold projected taxes due for the year of their required minimum distributions—taking one more step to avoid penalties. We make it a practice to get to know our client’s network of other professionals, especially their tax advisors. This can build trust and loyalty while also providing holistic services for your clients. IRA withholdings can sometimes be used to cover other income items. RMD money is not usually needed for a large number of clients, which is why the IRA withholdings work so well. The required minimum distribution will often go straight into an investment account. Instead of writing checks for taxes owed, use IRA withholding strategy to satisfy tax liabilities.

    It’s easy for older clients (or even the family members caring for them) to forget or make quarterly estimated payments late and trigger penalties. This is where the IRA withholding works. It eliminates penalties and additional taxes during tax season. Do what you can to relieve some pressure from your clients and their families. This is your time to shine.

  5. Split inherited IRAs by year’s end.

    If one of your clients, who owned an IRA with multiple individual beneficiaries, passed away during 2017, it’s time for you to help their family make sure all necessary paperwork is completed timely. Each named beneficiary can use their own life expectancy to calculate required minimum distributions (known as the stretch IRA) if the inherited IRAs are split into separate shares before the end of this year. It’s important to get this done in order to use the Stretch IRA. If not, all beneficiaries will be stuck using the age of the oldest, named beneficiary—even if they decide to split their shares later on. The split must be completed by the end of the year after the IRA owner’s death. (We strongly encourage our clients to split the IRAs as soon as possible to avoid forgetting and missing the deadline).

  6. You should know how to time a 10% penalty exception.

    If your client had to take an early withdraw from their IRA, they may qualify for an exception to the 10% penalty. If they do, the payment must be made in the same year as the IRA (or plan) distribution. This is easily missed at the end of the year, which voids the exception and forces the client to pay a huge penalty that could easily have been avoided. This situation usually affects those who need the money and cannot afford the extra penalties on top of their tax bill.

    Here’s a theoretical example: your client is 54 and needs to help her son pay a college tuition bill by the end of the year. She adds the charge to her credit card in December of 2018. In January, when the credit card bill comes in, she takes an early distribution from her IRA—thinking she qualifies for the education exception to the 10% early distribution penalty for IRAs. Only to find out, she doesn’t actually qualify.

    Your client still has to pay the 10% penalty because the tuition payment (made in December 2018) and the January 2019 IRA distribution were not in the same year.

    Check to make sure your clients who took, or are planning to take an early withdrawal will actually qualify for an exception and not run into similar situations with this “same year” rule. This is a more common issue than most people realize and as advisors, it’s our job to protect our clients.

  7. Check the state of lump-sum distributions for the net unrealized appreciation tax break.

    Don’t forget about net unrealized appreciation (NUA) in employer securities. This can dramatically cut your client’s tax bill down. This tax break is for clients who own a share of their companies’ stock through their 401(k). Depending on the stock’s appreciation, it might qualify for the lump-sum distribution tax break on NUAs. Generally, this is triggered by an event: the employee leaves the company, they reach the age 59½, they pass away, or becomes disabled. Under any of these situations, the company funds must be distributed within one year of this life-altering event taking place. If any of your clients qualify for this tax break, check with them to make sure all their plan funds have been withdrawn before the year’s end.

    Non-company stock funds can be rolled over, tax-free, to an IRA, while the company stocks go into a taxable account. Tax (ordinary income) is only paid on the cost of the stock. The appreciation is not taxed until the stock is sold. When it is sold, the NUA is taxed at a lower, long-term capital gain rate—regardless of how long the stock was held.


Here’s a free extra tip: while you are checking these items off your list, check your client’s beneficiary forms. Make sure they exist and are updated with your client’s latest wishes. Beneficiary form errors are rampant, costly, and far too frequent. Do your client a favor and show your added value. When you go the “extra mile”, your clients will notice that you truly have their back and will reciprocate with their loyalty and trust. They will also know that you have their back and are helping them to live their lives with purpose.


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