Latest news with #ApplebyRetirementConsulting
Yahoo
4 days ago
- Business
- Yahoo
Annual IRA audit: How to catch the costliest retirement account mistakes
Listen and subscribe to Decoding Retirement on Apple Podcasts, Spotify, or wherever you find your favorite podcasts. When it comes to individual retirement accounts (IRAs), the opportunities for errors are seemingly endless — and costly. With roughly 58 million US households owning IRAs, even one misstep with rollovers, account types, or required distributions could result in unexpected taxes or penalties. To help prevent that, retirement expert Denise Appleby, CEO of Appleby Retirement Consulting, shared common pitfalls and real-life examples on a recent episode of Decoding Retirement. Questo contenuto incorporato non è disponibile nella tua area geografica. Among the most frequent and overlooked mistakes? Ignoring IRS Form 5498, officially titled "IRA Contribution Information." This form reports IRA activity such as contributions, rollovers, conversions, fair market value (FMV), and required minimum distributions (RMDs). The form is so often overlooked because, in 2024, for instance, custodians weren't required to issue it until May 31 — well after most people file their returns. "So you have already done your tax return, you get this form and you're thinking, 'I'll just file it away because my accountant doesn't need it,'" Appleby said. "But you need it — and maybe you should share it with your accountant." Read more: What is a financial adviser, and what do they do? In one case Appleby highlighted, a woman opened what she believed was a traditional IRA. Years later, after a name change and a custodian update, the word "Roth" was removed from the account title, even though the account remained a Roth IRA. Assuming it was a traditional IRA, she made deductible contributions and even rolled over a 401(k) into it, thinking the rollover was tax-free. "Turned out that it was taxable because she processed a Roth conversion without knowing it," Appleby said. The resulting tax liability? Possibly up to $1 million. The mistake could have been caught earlier had she reviewed Box 7 of Form 5498, which identifies the account type (Traditional, SEP, SIMPLE, Roth). To avoid similar issues, Appleby suggested that every IRA owner conduct a yearly self-audit. With Form 5498, confirm your account type (Traditional, SEP, SIMPLE, Roth) in Box 7 and check your rollover contributions (Box 2) for accuracy. Form 1099-R lists distributions, which you'll also want to review. "If you took a distribution," Appleby said, "is it coming from the correct type of account? Is it reported as a direct rollover when it should be?" If you're 73 or older, you're required to take a required minimum distribution each year. RMDs are based on your account balance and IRS life expectancy tables. While the formula is straightforward, using the wrong table or a misstated balance can cause errors. And you are responsible for the accuracy — even if the custodian made the mistake. "If you took out a million dollars in December and rolled it over in January," Appleby said, "your custodian won't have that on record — and your RMD will be understated." To make sure your RMD is correct, you will need to refigure the amount by adding back the million dollars to your year-end fair market value. You can delay your first RMD until April 1 of the following year — but doing so means you'll need to take two distributions that year, potentially bumping you into a higher tax bracket. "Talk with your CPA about whether it makes sense to split the income across two years or take both RMDs in the same year," Appleby advised. If you fail to take an RMD, you could face a 25% excise tax. But there's good news: If you take the RMD during a correction window, the penalty drops to 10%. And in many cases, the IRS will waive the penalty altogether if the missed RMD was due to reasonable error. To request a waiver, file IRS Form 5329 and attach a letter explaining what went wrong. "They've never denied a request that I consulted on when the reason is reasonable," Appleby said. "Tell the IRS how much you took, how much you didn't take, and ask for a waiver. You attach a nice letter ... and you send it in." Even multiyear errors can be forgiven: Appleby said she's worked on cases where the IRS approved requests for cases with 10, 15, and even 18 years of missed RMDs. Appleby warned that when the IRS denies a request, it's typically because the form was filled out incorrectly, as many CPAs are tripped up by Form 5329's language. "In the spot where it says how much do you owe, you put zero," she said. "If you put any other amount, the IRS will take that as your acknowledgment that you owe them and come after you for that money." Rolling over a 401(k) to an IRA is common but still fraught with pitfalls. "Here's the No. 1 mistake that I see happening," Appleby said. "You tell your custodian, 'Do a direct rollover to my IRA' — and the account turns out to be a Roth IRA instead of a Traditional IRA. So here you have an unintentional Roth conversion." Always verify the destination account type before initiating a transfer. Also, check your 401(k) for after-tax contributions or employer securities — both of which can offer strategic planning opportunities if handled properly. Read more: What is a 401(k)? A guide to the rules and how it works. Many rollovers from retirement accounts must be completed within 60 days to avoid taxation. But if you miss that deadline, you may still have options. "Usually, you do a rollover because you want to have the amount excluded from income," Appleby said. If the error was due to something beyond your control, you can use the self-certification process — a no-fee, do-it-yourself fix — as long as you meet the requirements. The key: Act within 30 days of when the circumstance (e.g., illness, disaster) ends, and don't have a prior denied IRS waiver on record. Got questions about retirement? Email Robert Powell at yfpodcast@ and we'll do our best to answer it in a future episode of Decoding Retirement. Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service. Sign up for the Mind Your Money newsletter Effettua l'accesso per consultare il tuo portafoglio
Yahoo
7 days ago
- Business
- Yahoo
Annual IRA audit: How to catch the costliest retirement account mistakes
Listen and subscribe to Decoding Retirement on Apple Podcasts, Spotify, or wherever you find your favorite podcasts. When it comes to individual retirement accounts (IRAs), the opportunities for errors are seemingly endless — and costly. With roughly 58 million US households owning IRAs, even one misstep with rollovers, account types, or required distributions could result in unexpected taxes or penalties. To help prevent that, retirement expert Denise Appleby, CEO of Appleby Retirement Consulting, shared common pitfalls and real-life examples on a recent episode of Decoding Retirement. This embedded content is not available in your region. Among the most frequent and overlooked mistakes? Ignoring IRS Form 5498, officially titled "IRA Contribution Information." This form reports IRA activity such as contributions, rollovers, conversions, fair market value (FMV), and required minimum distributions (RMDs). The form is so often overlooked because, in 2024, for instance, custodians weren't required to issue it until May 31 — well after most people file their returns. "So you have already done your tax return, you get this form and you're thinking, 'I'll just file it away because my accountant doesn't need it,'" Appleby said. "But you need it — and maybe you should share it with your accountant." Read more: What is a financial adviser, and what do they do? In one case Appleby highlighted, a woman opened what she believed was a traditional IRA. Years later, after a name change and a custodian update, the word "Roth" was removed from the account title, even though the account remained a Roth IRA. Assuming it was a traditional IRA, she made deductible contributions and even rolled over a 401(k) into it, thinking the rollover was tax-free. "Turned out that it was taxable because she processed a Roth conversion without knowing it," Appleby said. The resulting tax liability? Possibly up to $1 million. The mistake could have been caught earlier had she reviewed Box 7 of Form 5498, which identifies the account type (Traditional, SEP, SIMPLE, Roth). To avoid similar issues, Appleby suggested that every IRA owner conduct a yearly self-audit. With Form 5498, confirm your account type (Traditional, SEP, SIMPLE, Roth) in Box 7 and check your rollover contributions (Box 2) for accuracy. Form 1099-R lists distributions, which you'll also want to review. "If you took a distribution," Appleby said, "is it coming from the correct type of account? Is it reported as a direct rollover when it should be?" If you're 73 or older, you're required to take a required minimum distribution each year. RMDs are based on your account balance and IRS life expectancy tables. While the formula is straightforward, using the wrong table or a misstated balance can cause errors. And you are responsible for the accuracy — even if the custodian made the mistake. "If you took out a million dollars in December and rolled it over in January," Appleby said, "your custodian won't have that on record — and your RMD will be understated." To make sure your RMD is correct, you will need to refigure the amount by adding back the million dollars to your year-end fair market value. You can delay your first RMD until April 1 of the following year — but doing so means you'll need to take two distributions that year, potentially bumping you into a higher tax bracket. "Talk with your CPA about whether it makes sense to split the income across two years or take both RMDs in the same year," Appleby advised. If you fail to take an RMD, you could face a 25% excise tax. But there's good news: If you take the RMD during a correction window, the penalty drops to 10%. And in many cases, the IRS will waive the penalty altogether if the missed RMD was due to reasonable error. To request a waiver, file IRS Form 5329 and attach a letter explaining what went wrong. "They've never denied a request that I consulted on when the reason is reasonable," Appleby said. "Tell the IRS how much you took, how much you didn't take, and ask for a waiver. You attach a nice letter ... and you send it in." Even multiyear errors can be forgiven: Appleby said she's worked on cases where the IRS approved requests for cases with 10, 15, and even 18 years of missed RMDs. Appleby warned that when the IRS denies a request, it's typically because the form was filled out incorrectly, as many CPAs are tripped up by Form 5329's language. "In the spot where it says how much do you owe, you put zero," she said. "If you put any other amount, the IRS will take that as your acknowledgment that you owe them and come after you for that money." Rolling over a 401(k) to an IRA is common but still fraught with pitfalls. "Here's the No. 1 mistake that I see happening," Appleby said. "You tell your custodian, 'Do a direct rollover to my IRA' — and the account turns out to be a Roth IRA instead of a Traditional IRA. So here you have an unintentional Roth conversion." Always verify the destination account type before initiating a transfer. Also, check your 401(k) for after-tax contributions or employer securities — both of which can offer strategic planning opportunities if handled properly. Read more: What is a 401(k)? A guide to the rules and how it works. Many rollovers from retirement accounts must be completed within 60 days to avoid taxation. But if you miss that deadline, you may still have options. "Usually, you do a rollover because you want to have the amount excluded from income," Appleby said. If the error was due to something beyond your control, you can use the self-certification process — a no-fee, do-it-yourself fix — as long as you meet the requirements. The key: Act within 30 days of when the circumstance (e.g., illness, disaster) ends, and don't have a prior denied IRS waiver on record. Got questions about retirement? Email Robert Powell at yfpodcast@ and we'll do our best to answer it in a future episode of Decoding Retirement. Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service. Sign up for the Mind Your Money newsletter
Yahoo
7 days ago
- Business
- Yahoo
Annual IRA audit: How to catch the costliest retirement account mistakes
Listen and subscribe to Decoding Retirement on Apple Podcasts, Spotify, or wherever you find your favorite podcasts. When it comes to individual retirement accounts (IRAs), the opportunities for errors are seemingly endless — and costly. With roughly 58 million US households owning IRAs, even one misstep with rollovers, account types, or required distributions could result in unexpected taxes or penalties. To help prevent that, retirement expert Denise Appleby, CEO of Appleby Retirement Consulting, shared common pitfalls and real-life examples on a recent episode of Decoding Retirement. Among the most frequent and overlooked mistakes? Ignoring IRS Form 5498, officially titled "IRA Contribution Information." This form reports IRA activity such as contributions, rollovers, conversions, fair market value (FMV), and required minimum distributions (RMDs). The form is so often overlooked because, in 2024, for instance, custodians weren't required to issue it until May 31 — well after most people file their returns. "So you have already done your tax return, you get this form and you're thinking, 'I'll just file it away because my accountant doesn't need it,'" Appleby said. "But you need it — and maybe you should share it with your accountant." Read more: What is a financial adviser, and what do they do? In one case Appleby highlighted, a woman opened what she believed was a traditional IRA. Years later, after a name change and a custodian update, the word "Roth" was removed from the account title, even though the account remained a Roth IRA. Assuming it was a traditional IRA, she made deductible contributions and even rolled over a 401(k) into it, thinking the rollover was tax-free. "Turned out that it was taxable because she processed a Roth conversion without knowing it," Appleby said. The resulting tax liability? Possibly up to $1 million. The mistake could have been caught earlier had she reviewed Box 7 of Form 5498, which identifies the account type (Traditional, SEP, SIMPLE, Roth). To avoid similar issues, Appleby suggested that every IRA owner conduct a yearly self-audit. With Form 5498, confirm your account type (Traditional, SEP, SIMPLE, Roth) in Box 7 and check your rollover contributions (Box 2) for accuracy. Form 1099-R lists distributions, which you'll also want to review. "If you took a distribution," Appleby said, "is it coming from the correct type of account? Is it reported as a direct rollover when it should be?" If you're 73 or older, you're required to take a required minimum distribution each year. RMDs are based on your account balance and IRS life expectancy tables. While the formula is straightforward, using the wrong table or a misstated balance can cause errors. And you are responsible for the accuracy — even if the custodian made the mistake. "If you took out a million dollars in December and rolled it over in January," Appleby said, "your custodian won't have that on record — and your RMD will be understated." To make sure your RMD is correct, you will need to refigure the amount by adding back the million dollars to your year-end fair market value. You can delay your first RMD until April 1 of the following year — but doing so means you'll need to take two distributions that year, potentially bumping you into a higher tax bracket. "Talk with your CPA about whether it makes sense to split the income across two years or take both RMDs in the same year," Appleby advised. If you fail to take an RMD, you could face a 25% excise tax. But there's good news: If you take the RMD during a correction window, the penalty drops to 10%. And in many cases, the IRS will waive the penalty altogether if the missed RMD was due to reasonable error. To request a waiver, file IRS Form 5329 and attach a letter explaining what went wrong. "They've never denied a request that I consulted on when the reason is reasonable," Appleby said. "Tell the IRS how much you took, how much you didn't take, and ask for a waiver. You attach a nice letter ... and you send it in." Even multiyear errors can be forgiven: Appleby said she's worked on cases where the IRS approved requests for cases with 10, 15, and even 18 years of missed RMDs. Appleby warned that when the IRS denies a request, it's typically because the form was filled out incorrectly, as many CPAs are tripped up by Form 5329's language. "In the spot where it says how much do you owe, you put zero," she said. "If you put any other amount, the IRS will take that as your acknowledgment that you owe them and come after you for that money." Rolling over a 401(k) to an IRA is common but still fraught with pitfalls. "Here's the No. 1 mistake that I see happening," Appleby said. "You tell your custodian, 'Do a direct rollover to my IRA' — and the account turns out to be a Roth IRA instead of a Traditional IRA. So here you have an unintentional Roth conversion." Always verify the destination account type before initiating a transfer. Also, check your 401(k) for after-tax contributions or employer securities — both of which can offer strategic planning opportunities if handled properly. Read more: What is a 401(k)? A guide to the rules and how it works. Many rollovers from retirement accounts must be completed within 60 days to avoid taxation. But if you miss that deadline, you may still have options. "Usually, you do a rollover because you want to have the amount excluded from income," Appleby said. If the error was due to something beyond your control, you can use the self-certification process — a no-fee, do-it-yourself fix — as long as you meet the requirements. The key: Act within 30 days of when the circumstance (e.g., illness, disaster) ends, and don't have a prior denied IRS waiver on record. Got questions about retirement? Email Robert Powell at yfpodcast@ and we'll do our best to answer it in a future episode of Decoding Retirement. Each Tuesday, retirement expert and financial educator Robert Powell gives you the tools to plan for your future on Decoding Retirement. You can find more episodes on our video hub or watch on your preferred streaming service. Sign up for the Mind Your Money newsletter Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
01-07-2025
- Business
- Yahoo
Costly IRA mistakes could crush your retirement
What are the biggest mistakes people make when managing their retirement accounts? This week on Decoding Retirement, Robert "Bob" Powell dives into the complex world of IRAs with "the IRA Whisperer" Denise Appleby, CEO of Appleby Retirement Consulting. Denise discusses what to do if you miss your required minimum distribution, the best way to do a 401(k) rollover, and the IRS forms you need to stay on top of your retirement. To hear expert insight on a key component of retirement planning, check out this episode of Decoding Retirement. Yahoo Finance's Decoding Retirement is hosted by Robert Powell. Find more episodes of Decoding Retirement at If you made a rollover contribution, is it in the right box? Right? Look at your 10 and 9Rs too. If you took a distribution, is it coming from the right type of account? Is it reported as a direct rollover when it should be? Things like that gives you an opportunity to audit your IRA, which you must doevery year. When I think about IRAs, individual retirement arrangements, I think it's a wonder why anyone would ever own one. You have to think about beneficiary designations. You have to think about RMDs. You have to think about various forms like 5498 or 1099R or 1099Q. Well, that's what we're going to talk about today with Denise Appleby. She's the CEO and founder of Applebee Retirement Consulting. Denise, welcome. So glad to be here and I'm so glad you're talking about this because people need to know. They, they do need to know, and, and that's part of our goal, Denise here is that at Decoding Retirement, we want this to be people's first and last stop in their search for not just retirement information, but also knowledge and wisdom, and you're here to help us accomplish that goal today. So thank you for being here. Yeah, I, I love the name Decoding because as you know, IRAs are governed by the tax code, and for you and I, it's about translating that to English or decoding. I love that. Yeah, well, it's a tall order and uh you among many, or maybe just a few, quite the best at what you do here. So let's start here with the most recent news, which is Form 5498. Uh, to me, whenever I get this form, I have no idea what to do with it. I know that there's a place on the, uh, 1040 where I have to list something or other to having to do with 5498, but, but help us learn what's going on with what's new about this. Yeah, so the, the, the, the challenge rate form 5498 is that using last year's example, it's not issued until May 31st of this year. So you have already done your tax return. You get this form and you're thinking, ah, I'll just file it away cause my accountant doesn't but you need it, and maybe you should share it with your accountant. I'll give you a real life example. The IRS just issued a private letter ruling. A private letter ruling is where, you know, if you have a problem and your custodian tell you they can't fix it, then you go to the IRS and say, Can you help me?So in this case this person set up an account that they thought was a a Roth Iray. At first everything was fine. Then she got married, changed her name, had the custodian change the account. They still kept it as a Roth account, but they took off the wrath of the title. So every time she looked at the account, she she's thinking, oh, this is a traditional so she makes contributions to the account thinking traditional literary contribution. She rolls over her 401k account to that account, thinking, oh, non-tax will will roll over, only to find out years later, about two years ago. Now this happened in like 2012. Wow. So then she found out about two years ago that the account was actually a Roth and what that meant is, let's say she rolled over.a million dollars from her traditional 401k thinking that it was non-taxable turned out that it was taxable because she processed a conversion without knowing it, so she went back to the IRS after she got a denial from a custodian and the IRS allowed her.A late recharacterization. Remember those? Yeah, they're not allowed anymore. Yeah. After paying a professional to help her fix it and go to the IRS and paying the IRS's huge fee, the IRS says it will allow you to do this recharacterization. Now the problem that the recharacterization can be done, that's good. The question is, what do you do when you get your Form 5498? There's a box on the form going to be checked to see if it's a regular IRA, SEP IRA, simple IRA, or raw IRA. Had she checked that, she would have seen that it was a raw IRA despite what the title said. So when you get your Form 5498 this year, which was just sent out in May, look atThat. And that's only one of the many things that you need to look for, Bob. For instance, if you made a rollover contribution, is it in the right box? Right? Look at your 10 and 9Rs too. If you took a distribution, is it coming from the right type of account? Is it reported as a direct rollover when it should be?Things like that gives you an opportunity to audit your IRA, which you must do every year. Yeah, now, am I correct to say that the information on the 5498, which captures the gross amount in your IRAs, there's a place in the 1040 to actually list that number, is there not? Not the gross amount, but let's glad you asked that question. Let's say you took a distribution from your IRA and you rolled it took it from your traditional IRA. You roll it to a traditional IRA. That's a non-taxable transaction. The distribution side is going to be reported on the 1099R, and that's what the IRS looks at to say, Oh, Bob, you took out a million dollars, or 10, owe me income tax on 100,000 because the IRA custodian is going to report it as being taxable, but they also check a box that says taxable amount not determined, meaning as far as we know it is, but we're not swearing that it when you roll it over, it's going to be reported on your form 5498, and that's where that taxable amount box not determined comes in because it leaves room for your tax preparer to say, Bob, let me see the form 5498 because I want to make sure you rolled it over, right? Or it would have been on your year end statement by then, but the Form 5498 is what is sent to the IRS as proof that you rolled it over. So your your accountant used that information and you're right, that's the information they're going to use to report on your tax return, your 1040 to say Bob took out 100,000 and it's non-taxable, so we report it on line 4A distribution. We exclude it from line and rewrite roll over beside it so the IRS knows what to look for when they get that Form So I was right to say at the beginning that it's a wonder why anyone would want to own an IRA given all the landmines that await people, whether it's Form 5498 or one of my favorites, right, is at some point in one's life, if you own a traditional have to take required minimum distributions and then you'll have to think about things like required beginning date and so forth and so on. Um, and, and a lot of people miss their RMDs. What, how do you handle that? The, what are the what are Denise's rules for handling missed RMD? Not a minefield. So, but I do believe everyone should have an IRA, but you're right, you want to protect certain things and that includes taking a required minimum distribution. Bob, I've come across cases where people didn't take required minimum distributions for 18 years, right, especially when it comes on to inherited accounts. So you got to remember take required minimum distributions from your account. You have to, if you're at least 873 this year, you have to take an R&D for this year. If this is your first R&D year, you just reached 873, you have one due for this year, but you can take it as late as April 1 of next year. Every other R&D must be December 31st of the year for which they're due. So if you wait until next year, you're going to have two to take, and that's a conversation you must have with your CPA. Should I take both of them next year or spread it out between two years because that could affect the amount of income tax. So let's say hear Bob and I talking, you're like, Oh my God, I didn't take my required minimum distribution. And not only that, I inherited an IRA from my uncle 5 years ago, and he was already taking his required minimum distribution, which means I have to take annual required minimum do I do? Because when you don't take a required minimum distribution, Bob, you owe the IRS a 25% excise tax on the amount that you didn't take. It used to be 50% as of 2023, it has been reduced to 25%.Now people usually ask me, they would say, Denise, don't tell the IRS I asked you, but what if I just pretend I don't know and don't take it? Well, you know, here's a reason why you should take it as soon as you find out. First of all, there's a new provision where if you miss your RMB and you take it during what is known as a correction window, the 25% excise tax is automatically reduced to 10%.Right, so that's a bonus right there. The second thing is, if you miss the deadline due to reasonable error and you ask for a waiver, the IRS, I'm gonna go on a limb and say will. I, you know, I prefer to say will likely, but based on my experience, they've never denied a request when the, the reason for missing the deadline is reasonable. Let me give you a reasonable had a 403B account. They also had a traditional IRA. They had to take required minimum distributions from both accounts. Now the law says if you have a 403B and you have an IRA, each of those accounts must satisfy the required minimum distributions there are some rules that allow you to aggregate RMBs. Say you have multiple traditional set and simple IRAs. You can aggregate those, meaning you can combine RMBs for those accounts and take it from one if you want to. Same if you have multiple 4 or what you can't do is take the R&D for 403B from the IRA. This taxpayer didn't know, and they were actually working with a CPA who told them that they could do all along, they calculated the R&D for the 403D, they calculated the R&D for the IRA. They totaled it and they took it from the now they have a new CPA who says, no, you can't do that. In a case like that, here's what you CPR or tax preparer must file IRS Form 5329. There's a space on it where you report your required minimum distribution in that same space. You tell the IRS how much you took, how much you didn't take, and you follow the instructions and ask for a waiver. You attach a nice letter explaining how come you missed your R& you ask nicely for a waiver of of the excise tax and you put everything together and send it in. And no, don't worry if it has been multiple years. I have worked on cases where they have been multiple years, 1015, 18 years and we get a letter back from the IRS saying, yeah, your request has been approved, so don't give up you find out that you owe the excise tax, because there's provision under the tax code that the IRS uses to waive the excise tax if the deadline was missed due to reasonablecause, right? And if the IRS rejects your request, you you've mentioned that it's typically because you filled out the form incorrectly. Is that fair to say? Yes, yes, yes, I've, I've had cases where come to me and say, Denise, I've listened to your seminars, and based on what you tell me, the IRS wouldn't reject a request if there's reasonable cause. But here I get a rejection letter and I say, Give me that letter, let me see it. Then give me that form that you filled out. Turned out they filled out the form incorrectly because if you follow the instructions as they're written, it can right? And so many brilliant people have been tricked by those instructions. You got to read them carefully and make sure in the spot where it says how much do you owe, you put 0, because if you put any other amount, the IRS is going to take that as your acknowledgement that you owe them and you're willing to pay them, so they're gonna come after you for thatmoney. All right, Denise, we have to take a short break and when we come back, we'll talk about maybe Form 1099Q and RMDs, again, if you don't mind, we'll be right back. Welcome back to Decoding Retirement. I'm talking to Denise Appleby. She's the CEO and founder of Applebee Retirement Consulting. Denise, when we left off, we were talking about RMD's and I promised we were going to come back and tackle even more about RMDs andI think one of the biggest things that people need to tackle when they think about this is how do I actually calculate what my required minimum distribution is? Uh, it's fairly simple, but maybe not for some. Maybe not, maybe not it comes to an employer plan like a 401k, the good news is that the plan administrator will likely calculate it for you. Smaller employers sometimes farm it out to, say, an IRA custodian, but you want to know how to calculate the RMB. If you have an IRA, your IRA custodian must send you an RMD notice by January 31, so we're in, say, 2025, you should have gotten it by December 31, 2025. But here's why you want to know how to calculate they make a mistake, you're responsible. Now there are 3 life expectancy tables. The first thing you want to think about the single life expectancy table, which is used for beneficiary accounts, the uniform lifetime table, which assumes that your beneficiary is 10 years younger than you are, and the joint life expectancy table, if you're married to someone much younger, more than 10 years younger, and the and they're your sole primary beneficiary, then you can use that table. So if you're doing your calculation for get the fair market value for December 30, 2024. Then you look at the life expectancy table and based on your age, there's going to be a factor beside it. You get, you grab that factor and you divide it into the fair market value. Voila, you have your R&D. Sounds too easy, right? Here's something that can trip you up. Using the wrong life expectancy table, I just explained when you should use either of the if you have an outstanding transaction, Bob, say in December 2024, you took out a million dollars as a distribution and you rolled it over in January, when your custodian does your calculation, they won't have that million dollars records and so they'll do the R&B calculation minus the million dollars. That means your RMB is going to be short. So you got to look for things like that to make sure that your RMB is right because it's you who's going to be responsible, not your IRA custodian. Yeah, so in many cases, there is some uniformity between IRAs and employer plans with respect to RMDs, but that's not always the case, is that correct? Yeah, that's not always the case. The the the calculation formula is generally the same, right? And if you're still working for an employer that provides your 401k, the terms of the plan couldSay, oh, you're 73, you don't need to start yet because you're still working. Wait until you retire. Don't always assume that that's an option. Check with them first to make sure. Also, if you run your own business, that option is not available to you because you're referred to as what they call a 5% owner. But one of the primary differences, Bob, is if you have a 401k 401k stands on its own when it comes to R&Ds. If you have two jobs like I used to, you still cannot combine those 2 401k accounts. But if you have multiple traditional SEP IRAs, you calculate them you may say, you know, Bob, you're my beneficiary on IRA #1, and I like you better than the beneficiary that's on IRA #2. So I will take from the IRA that you're the beneficiary, but I'll take everything from the IRA where I have beneficiary # that gives you some flexibility. Do not forget your inherited accounts. When we talk about required minimum distributions, there's a tendency to think that it applies only to account owners. But for individuals who have accounts that they inherited, required minimum distributions apply to those two. In some cases, not every year. For instance, if the account owner died before they were supposed to start R& 10 year rule applies to you, then you don't have to do anything. It becomes a tax question as to whether you should during the 1st 9 years you got an MTA account body in year 10. But if they died on or after the date they were supposed to start taking R&Ds, you have to take R&Ds every year, and the life expectancy factor helps to determine how much you should take. Yeah. So we're going to send folks to your website toLearn more about that and and other things that we're not going to talk about today like designated beneficiaries and non-eligible beneficiaries, etc. We'll, we'll send them to your website. But I, I do want to ask, we now live in a world where many folks are gig workers and maybe setting up solo 401ks where, in effect, they are 5% owner, so they would be subject to the RMD rules even if they reach a required beginning date. Is that correct? Absolutely, if you, if you run your solar 401k, you're at least 873 this year, you have to take your RMD. Now, if you work for a huge corporation, then they could have said, you know, wait, you don't have to, and I'm saying cool, you gotta check with them, but you're absolutely right, for gig workers, there are 5% owners and they don't have the option to wait past 873. right, another form that where there's been some updates is something called the IRS form 1099Q. and uh I don't know what stands for. Maybe we're running out of alphabets here. What the folks need to know about that qualified tuition programs like uh you know, 529 plans. So one of the most popular feature that came out of Secure Act 2.0 was this new provision where if you have excess amount in your 529 can move it to your raw IRA as a regular raw IRA contribution. You're subject to the annual IRA contribution limit each year, and you have a lifetime limit of $35,000. Now you can do this only if you have had the 529 plan for at least 15 years. And so there were certain questions aboutIs this going to be reported, because if you move $5000 from the 529 plan to the Roth, it's going to include a prorated amount of basis and earnings, and we weren't sure how that was going to be communicated to the 529 owner. Now the IRS have updated the form if you go to that form now, you'll see where there's an option for the the 529 plan holder or custodian to indicate to the IRS that yes, you have moved X amount from your 529 plan to your BI rate has been done as a direct transfer so it meets all the requirements that it should meet. So when someone might be moving from one employer to another, oftentimes they're told to do 401k rollover trustee to trustee transfer to their new employer if they're able, or if not, to roll it into directly to an IRA. Is there a big mistake that people need to avoid when they're doing this by chance from your perspective? Yes, I'm so glad you mentioned that. So you avoid the 60 day deadline by doing a direct rollover, say from a 401k or to your IRA or you use a trustee to trustee transfer if you're moving from IRA to IRA. Here's a number one mistake that I see happening. You set up the account, it's a Roth tell, say your custodian of the 401k plan, do a direct rollover to my IRA. The number is 1234567. This is a traditional IRA. The funds hit the account. It turns out that it's a Roth IRA, and so here you have an unintentional Roth make sure it's done as a direct rollover. Verify the type of account first to make sure if you want it to go to a traditional liar, it goes to a traditional liar. And here's a tip, Bob. Check your 401k account statement. Do you have after-tax amounts in it? Make sure that goes IRA, that's a tax-free conversion. Do you have employer securities? Stop and call your CPA or your financial advisor because there are special tax benefits that could apply to those employers securities. And if you do anything, it might mess up that opportunity. I'm afraid we've run out of time. We never got to backdoor Roths or mega backdoor Roth, so maybe you'll come back on in a few months and we can talk more about that. In the meanwhile though, I want to thank you for sharing your knowledge and wisdom with us and our listeners and our viewers. It's so greatly appreciated. Thank you. Thanks for having me, and you're doing a good thing here. I appreciatethat. Thank you so much, Denise. So that wraps up this episode of Decoding Retirement. We hope we provided you with some actionable advice to help you better plan for or live in retirement. And remember you can listen to Decoding Retirement on all your favorite podcast platforms. And if you've got questions about money, about retirement, email me at YF podcast@yahoo and we'll do our best to answer your questions in a future episode. This content was not intended to be financial advice and should not be used as a substitute for professional financial services. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Miami Herald
23-04-2025
- Business
- Miami Herald
457(b) retirement plan withdrawals: How to avoid penalties
Let's face it: the business of retirement is complicated. We spend our entire careers salting away money only to discover rules we didn't fully understand or know when it comes time to pay for retirement. Make a mistake, and it may cost you a pretty penny. There are many potential pitfalls, including when withdrawing money from deferred income plans like a 457(b). Related: How to plan 457(b) withdrawals in retirement with a pension 457(b) plans aren't as common as other tax-advantaged plans, like 401(k) or 403(b) plans, but they are a valuable retirement savings tool offered by many government agencies and some non-profits. A 457(b) allows workers to set aside pre-tax income that can grow tax-deferred. As a result, unless the plan has a Roth option, retirees will owe income taxes on any withdrawals. There can, although not often, also be withdrawal penalties. We recently reached out to a retirement expert to answer a reader's question about planning withdrawals from a 457(b) plan when pension income is also present. Her response prompted some questions and comments, including this one: "After reading your article, How to plan 457(b) withdrawals in retirement with a pension, on retirement regarding 457(b) plans, I have a comment. If you retire before 59½, you do not have to pay a penalty on your withdrawal. As a former payroll administrator for a state agency, this is why people defer into a 457(b) rather than having to wait on their 401(k), which has penalties for withdrawals before age 59½." Related: How to plan 457(b) withdrawals in retirement with a pension You are technically right that distributions from a 457(b) plan are not subject to a 10% early distribution penalty, but that is true if all the amounts are attributed to 457(b) contributions, said Denise Appleby, CEO of Appleby Retirement Consulting and author of the "2025 IRA Quick Reference Guide." Remember too that in the question answered, the person stated they have assets in pension plans as well. Therefore, Appleby says "Mentioning the 10% penalty is a catch-all in the event the distributions are early (pre-59½) and made from a qualified pension plan." Related: Dave Ramsey warns Americans on Social Security, 401(k)s According to Appleby, the 10% early distribution penalty is something to consider for a 457(b) plan if you rolled over assets from a non-457(b) plan, such as a 401(k), to your 457(b) plan: Distributions from a governmental 457(b) plan are subject to the 10% early distribution penalty to the extent the amount is attributed to rollovers from an IRA or employer plan other than another 457(b) plan. For this reason, it's important for a participant to understand what money is being withdrawn from a 457(b) plan, so as to avoid unknowingly withdrawing funds subject to early distribution penalty, including rollovers from other plan types such as 401(k)s. Typically, 457(b) plans make this easy by creating a sub-account for the amounts that were rolled over into them, allowing for easier tracking. Appleby says there were other reasons to mention early distribution penalties in response to the individual's question, including: The person asking the question stated they have assets in pension plans as well. Therefore, the response covers pension plans. Mentioning the 10% penalty is a catch-all in the event the distributions are early (pre-59½) and are made from a qualified pension plan. Since the person who asked the question is considering retirement, one can assume they are past age 59½. But that is not always the case, so we thought it best to at least have their financial adviser consider it, just in case, Given that the person writing the original question didn't provide detailed information, Appleby said the best approach was to provide a broad response that included the 10% early distribution penalty. "You will notice that we emphasized consulting with an adviser," said Appleby. "We do so because an adviser proficient in this area will ask probing questions that allow them to provide a response tailored to the client's retirement savings." These questions include the following: Have you ever rolled over any amount from another type of retirement plan to your 457(b) plan?What is your date of birth? Reason: to determine if the 10% penalty is a point of do you plan to retire? To determine the age at which retirement might occur. "The adviser should also obtain a copy of the account statement to verify the type of account, as I know from experience that non-professionals often misidentify account and plan types," said Appleby. Got questions about retirement? Email For more, read: Ask Bob - Retirement Daily on TheStreet Related: Veteran fund manager unveils eye-popping S&P 500 forecast The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.
