Life is busy: managing a career, running a household, and caring for loved ones all can be consuming.
As we work hard to gather assets and prepare for a different season of life, it is easy to neglect and overlook important financial documentation on our retirement plan accounts (e.g. 401(k)s and IRAs). Following are three important considerations for maintaining your retirement plan, which can keep you better prepared for retirement and protect your family. Keeping your account documentation up to date can save you and your heirs time, money, and grief.
When life’s changes involve a move or address change – or even an email address change – it is very important to update your address and contact information with your retirement plan provider or IRA custodian. Your providers need to contact you for routine purposes or to address changes in their business.
The most obvious reason for keeping your information current to help in maintaining your retirement plan is so that you continue to receive your statements and tax reporting documents. Monthly or quarterly statements may be sent to you in the mail or posted to a secure portal with an email notification. You may receive a 1099-R from your provider reporting a distribution or some other information about your account. Without having the necessary tax information, you may neglect to properly report your income on your individual income tax return all while the information sits in someone else’s mailbox.
Another scenario would be a case where an IRA custodian may go through some form of corporate change, such as a merger or acquisition. It’s also possible for the custodian to withdraw from being a custodian to your IRA. While this is very uncommon, the possibility exists and without a way for you to receive proper notifications, certain actions, including distributions, may occur without your knowledge. A check could be mailed to the last address on record and never make it to you.
Each of these actions requiring your address and email address could have important tax ramifications.
Retirement plan accounts such as IRAs, 401(k)s, 403(b)s, and other account types rely on a beneficiary designation to direct who becomes the owner of your account upon your death.
This factor is often misunderstood or overlooked by plan account holders. Some people mistakenly believe that their Will controls how their retirement accounts are distributed and neglect to name a beneficiary.
When it comes to maintaining your retirement plan assets, allowing your estate to distribute the IRA can create very serious income tax consequences. If you neglect to name a beneficiary, upon your death, the IRA will be completely distributed to your estate and the proceeds will be added to taxable income. In cases of large retirement plan balances, this may result in paying income taxes at some of the highest marginal income tax rates. This could result in your heirs only receiving roughly 60 to 65 percent of your account.
Not naming a beneficiary on a retirement account could have the same impact as deliberately naming “Uncle Sam” as a 35% beneficiary of your account.
Along with naming a beneficiary, anytime you have a change in your family, they will generally require beneficiary elections to be revisited. You could experience the birth of children or grandchildren, a divorce, a death in the family, etc. and all should trigger a re-examining of your beneficiaries named. There have been cases where a divorced individual neglected to keep their beneficiary designation up-to-date and died, unintentionally leaving their retirement assets to their ex-spouse. Also, be aware of naming minor children as beneficiaries, as you’ll just need to make sure they have a custodian to be named to hold the assets on their behalf until they reach majority age.
Planning for contingencies is another important consideration. Who should become the owner of the account in the event that your primary beneficiary has predeceased you? These decisions must be made in a thorough and thoughtful manner. If one of your beneficiaries dies before you it is important to update the beneficiary documents to reflect the new circumstances.
Tracking your contributions into your IRAs is important. You may have a combination of deductible and non-deductible contributions over the years.
To make certain you don’t pay taxes on money that you have already paid tax on, it is incumbent on the taxpayer/IRA owner (i.e. you) to track your “basis” within your IRA. IRA basis represents the after-tax or non-deductible contributions to your IRA. Tracking this is done by completing and updating the IRS Form 8606 each year with your tax return. It’s a bit of extra paperwork, but this keeps track of your cumulative basis in your IRA account and will be helpful when you make withdrawals or consider a Roth conversion – the accuracy will be key to be sure you’re not paying taxes more than once on the funds.
Some taxpayers will go as far as segregating the deductible contributions in one account and non-deductible in another. Separating the contribution types may be practical for purposes of managing your IRAs, however it is no substitute for filing the Form 8606.
Another form that IRA custodians send out is the Form 5498. This is usually sent out by the custodian of your IRA twice a year. You generally will receive a 5498 shortly after the calendar year end.
This form reports to you and serves as documentation of your IRA’s year-end value, which would be useful for determining required minimum distributions. Another important piece of information reported on the 5498 is the contributions made for the calendar year. Since taxpayers have up to the filing date of their return to make IRA contributions for the previous calendar year, the IRA custodian will send out a second form 5498 after the filing deadline to report any contributions made during the new year as a previous year’s contribution.
In addition to year-end values, required minimum distributions, and IRA contributions, the 5498 also reports rollovers and Roth IRA conversions. The IRA custodian or retirement plan trustee is responsible for reporting this information to the IRS and providing copies to the account owner. This is one more piece of documentation that should be maintained with your income tax records. Together, these steps can help you in maintaining your retirement plan.
Be thoughtful, diligent and meticulous with your retirement plan account documentation so that you and your family can enjoy the full benefit of your tax-deferred accounts. If you’d like help updating your accounts, or being sure you have the right understanding and direction for your financial future, we’re happy to start a conversation anytime. Get in touch with us today!
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.