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IRA Distribution Mistakes - How to Blow your Retirement Money


With the population aging and over 4000 people a day being forced to take IRA distributions (such distributions are mandatory by April 1 after reaching age 70 1/2), mistakes in taking IRA distributions can total in the billions. Yet, because people have had no prior experience, mistakes are rampant. Here are 4 common IRA distribution mistakes to avoid.

IRA Distribution Mistake #1

Every IRA owner can name a beneficiary and "stretch" the IRA for maximum tax deferral over the next generation.

Informed IRA owners believe that the following will occur with retirement assets they do not use during their lifetime. Say they leave $500,000 of retirement assets to heirs. They believe junior will make small withdrawals each year (required by IRS) and at 6%, the account with a 42-year-old beneficiary, will generate $2.5 million during junior's lifetime (IRA distributions plus ending balance at life expectancy). This sounds great but it may never happen.

There are at least 2 ways that the stretch IRA can fail. The first way is because of a custodian with rules that do not permit lifetime IRA distribution payments. This is particularly common in qualified plans where the rule may be that "all IRA distributions to beneficiaries are to be completed within 5 years." Since no one ever reads that fine print for their qualified plan, they have no idea that a fast IRA distribution will be forced to non-spouse beneficiaries.

The other problem is the beneficiary. Just because mom and dad have the good sense to understand tax deferral does not mean that junior will comply with this wisdom. The minute junior finds out that he can close the IRA, distribute all the money and buy a Ferrari and Lamborghini at the same time, he does so, pays a fortune in taxes and blows the money to have fun.

The way to control this is to have leave retirement assets in an IRA trust. In a trust, mom and dad can control how the heir gets paid.

IRA Distribution Mistake #2

I am leaving my IRA to my wife. I only have one son and he can do with the IRA what he wants when we are both gone. My situation is simple.When most people select beneficiaries for their IRAs, they select their spouse or their children. As simple as this seems, it can create problems. Consider these two scenarios.

When a plan owner leaves an IRA account to the spouse, it inflates the spousal assets. And when the spouse later dies with an estate exceeding $2 million (the estate exemptions limit in 2006), they pay estate tax. By leaving the IRA to the spouse, the deceased spouse has created unnecessary estate taxes by making the survivor's estate larger.

So instead, they leave the IRA to the son. But as indicated before, this leaves the son total control over the asset. He may withdraw the funds immediately and decide to buy a mansion jointly with his spouse (who was despised by mom and dad). To complete the misery, let's say that the following week, the daughter-in-law files for divorce and gets to keep the mansion in the settlement. Mom and dad just gave the despicable daughter-in-law a mansion with their IRA money. Even in death they have money problems.

To avoid the above two scenarios, they decide to leave the IRA to their "estate." Many attorneys advise that you never leave a retirement plan to your estate. Because at death, the IRS requires the account to be rapidly distributed rather than enjoy the potential stretch over the lifetimes of beneficiaries. Additionally, the IRA will now be a probate asset and subject to claims of creditors. So what do rich people do to avoid the three gloomy scenarios above? They leave their IRA in a trust and appoint a trustee like an accountant, financial advisor, attorney, etc., a person that has good common sense and tax knowledge. Within the boundaries of mom's and dad's wishes and IRS-required minimum distributions, the trustee will determine who among the beneficiaries will get the IRA and how much they get. The trustee will determine how quickly this IRA money gets distributed over and above the annual minimum amount of required IRS IRA distributions. Mom and dad can even give very detailed instructions. For example, they could dictate no IRA distributions for purchases of homes with the despicable spouse. Or if the money is to be used for education they may stipulate that up to $15,000 a year can be distributed, or to start a business up to $25,000 can be distributed, and they can go on and on with such instructions.

IRA Distribution Mistake #3

The IRA owner has checked with the custodian and yes, they do allow lifetime distributions to non-spouse beneficiaries. Additionally, their two unmarried sons understand tax deferral and there is no need for a trust. Everything is okay.

Many plan owners don't consider what happens if their beneficiary pre-deceases them.

Let's say you have two sons, Jack and Tom. Your name them as primary beneficiaries for the IRA distributions by completing an "IRA Beneficiary Designation Form" at the bank or securities firm.

Jack and Tom each have a son. Jack's son is Bob. Tom's son is Dan. So you write the grandson's names on the line of the beneficiary designation form that says "secondary beneficiaries."

If Jack dies before his parents who own the plan assets, they probably think Jack's share goes to his son, Bob. Wrong.

It goes to Tom, because on the beneficiary designation form, there is no place to specify how the primary beneficiaries and secondary beneficiaries are related. There is no place for you to explain your intentions or write "per stirpes" to clarify intentions with respect to those beneficiaries. Those beneficiary designation forms with the bank or the securities firm are not sufficiently detailed to carry out your wishes.

At minimum, you should replace those forms with your own forms, called an "IRA Asset Will." This can be inexpensively prepared by any attorney. And if the custodian won't accept it, move your account to another custodian.

IRA Distribution Mistake #4

Failing to use IRA funds for charitable intent

If you want to leave even $1 to charity, do it from your IRA money. You can specify one or more charities to receive portions of the IRA and the heirs will thank you. When taxpayers leave heirs a dollar of IRA funds, the heirs will pay, for example, 35 cents to tax and have 65 cents left to spend. If the estate is over $2 million, heirs will also pay estate tax on this money and may have only 30 cents left from each dollar. However, when mom and dad leave heirs a dollar that is non-retirement money, heirs can spend it with no income tax. Therefore, heirs would much rather have "regular" money and not IRA money.

Is It Really Necessary To Create A Family Budget


The thought of budgeting may seem simple to do, right? However, if we really get into it and try to balance our income and expenses, we realize that it’s not that easy to do. Still, having a budget or spending plan can help us manage our finances better.

Money issues, especially within the family, can be a source of relationship conflicts. Dealing with money problems always gives stress. Thus, it is important that we create a budget for the family. And it should not only be you who are going to do it but all of the members of the family should get involved. Each, even young children, should have a say on the family’s finances.

Step-by-Step Guide

Here’s a guide to help you start making your family’s budget.

1. Assess your current financial situation. Before starting to write down a budget plan, try to check first your spending patterns for the past year. You may want to take a look at all your utility and other bills for the past year. You would also need a copy of your salary records and income tax return for the past year. In case you do not have copies of your bills anymore, utility companies and other service companies like credit card can give you a record of your transactions or provide an estimate.

2. Design budget outline. There are sample budget outlines found in the Internet that you can download and make use of. You can also find some in magazines and books. Utilize these things to create an organized and well-written family budget.

3. Write them down. Once you have all past references to your income and wages, as well as a budget design, you can now start writing down your income – from wages, pensions to tax credits – for the current month. Then write down your expenses for the month – utility bills, credit card bills, and other purchases. Receipts and your checkbook may be good references to find the information.

4. Lifestyle check. You need to check your family’s lifestyle and spending patterns. This is where every member of the family should get involved. Think about the important things that each member spends on. Think also of the things that you can probably do without.

5. Plan for next year. Estimate the income and expenses that your family may have for the next year. Your income may remain the same or you can also adjust it if you expect it to change within the year. You also need to take into consideration special occasions where you usually spend on like Christmas, birthdays, Thanksgiving and other holidays.

6. Know your credit standing. You also need to find out your current credit standing. You may request for you Credit Report from a credit bureau near your area. You can find them listed in the yellow pages.

Writing down a family budget will definitely help you realize how wisely you and your family spend money. If you feel that you are spending too much more than what you are getting, then it’s high time to start fixing your finances and sticking with your family budget.

Saving is also one way to improve your finances. For a family, there should be a substantial amount of savings that you can use in case of emergency. As head of the family, you should impress on your spouse and children the importance of savings. If you can commit your whole family into saving, then most likely, you will not have a problem in sticking with your family budget.

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