Roll On, Rollover!

A few years ago, I completed the course work and exams to be a Retirement Income Certified Professional and am happy to report that the information in this course was fascinating. Just when I think I know something about my financial services, I learn there’s so much more into which to delve. This week, I’d like to look at some common mistakes that people make with regard to their 401(k) accounts and estate planning.

As of the end of 2020, The Investment Company Institute reports that Americans had over $32 trillion in retirement accounts, and that retirement assets make up 35 percent of total assets in the US. For many middleand upper-middle-income investors, the actual percentage is higher because there are limits to plan contributions; wealthy clients can’t put all their assets into retirement accounts. And for those with lower income, they typically can’t afford to max out the accounts. So when we middle-income investors want to leave our retirement assets behind, how easy is that? An article published by Premier Trust outlines some common mistakes.

Mistake #1 – Not naming beneficiaries, or not updating beneficiaries previously named. People often mistakenly believe a will takes care of their wishes to this regard. Not so. Let me say that again – NOT SO. When a person dies, the named beneficiaries in the 401(k) paperwork are who receive the funds in the plan. If there is no named beneficiary, then 401(k) plans typically provide for what will happen. For instance, most plan documents state that if no beneficiary is listed, the funds pass to a surviving spouse. That’s usually fine, but if there is no surviving spouse, then many plans determine that the funds go into the deceased person’s estate… where creditors can often access the funds. I could repeat horror stories, but let’s leave it at this – Please, please review your beneficiaries regularly. Make it a birthday thing.

Mistake #2 – Not stretching withdrawals. When a person inherits a pre-tax retirement account, there are rules regarding withdrawal of the money. The

IRS will not allow us to simply let that money sit until we need it, in most cases. A spouse has the most options, since he/she can usually just roll the money into his/her own pre-tax account until it’s time for him/ her to take withdrawals. Other beneficiaries, however, don’t have that privilege, and money must be withdrawn (and taxed) either immediately, or spread over ten years. The specifics of what is recommended depend on the circumstances and those are too many to go into here, but making the wrong choice can be an expensive mistake. Inherited pre-tax money to a non-spouse is seen as income in the eyes of the IRS, so taking too much in one year might throw the inheritance recipient into a higher tax bracket. Talking with a financial professional and a tax professional before making any decisions with regard to an inherited pre-tax account would most definitely be a wise move.

Mistake #3 – Failing to properly use trusts to protect assets. Designating beneficiaries in 401(k) plans ensures the orderly transfer of retirement assets; however, a trust can put into place additional protections and controls. Says Rick Randall, CEO of the National Network of Estate Planning Attorneys, “Retirement plans are protected from creditors, divorce settlements, instructions for remarriage if someone dies and gets remarried, even from being counted against long-term care expenses during catastrophic illnesses, but that protection disappears when the assets are inherited.” So let’s say you have an heir who you’re afraid will spend irresponsibly and you’d like to set up controls in the event of your premature death. That’s where a trust can help you. I almost always ask my clients if they work with an attorney, and shockingly few do. It’s worth an hour of your time, and perhaps a few well-spent dollars, to talk to a lawyer to determine if a trust is appropriate for your situation.

Mistake #4 – Not coordinating financial planning and estate planning. It is critical in a good estate plan that financial professionals work with the client’s estate planning expert so that each, in his/her area of expertise, can spot potential problems early. Each professional is looking through a different lens so that, together, they gather the big picture for their associated client. I have several attorneys and CPAS in town with whom I collaborate on a regular basis and, in every case, we help each other spot potential problems and keep each other apprised of the progress of our client’s plan. It’s a win-win for each of us, but more so for the client.

Simply assuming everything is in line with your 401(k) or other retirement plan is – to be blunt – a mistake. Please take the time to regularly review your plan with two things in mind – What if I live? And what if I die? I think the worst thing is not “waking up dead”, as I say, but rather knowing that the end of your life is coming, and knowing there’s no time to fix what should have been done.