17
Morningstar FundInvestor
July 2
014
estate plan, including beneficiary designations. If
you’ve used an estate-planning attorney to help draft
documents such as powers of attorney and living
wills, ask him to also look over beneficiary designa-
tions to make sure those designations sync up with
the rest of your plan. Furthermore, check up on your
beneficiary designations if your company retirement
plan has changed providers; I’ve seen instances
where the previous designations didn’t automatically
transfer over to the new firm.
Goof 4
| Running Afoul of the 60-Day Rule
The average American will stay at a job
4
.
4
years,
according to the Bureau of Labor Statistics. For
individuals with company retirement plans, all those
job changes mean a lot of opportunities to roll over
assets from the former employer’s
401
(k),
403
(b), or
457
into the new employer’s plan or an
IRA
.
Once you’ve pulled your money from the former
employer’s plan, you have
60
days to get it rolled over
into another tax-deferred receptacle. If you don’t
get the money into the hands of the new provider
within that window, and you’re under age
59
1
/
2
,
the withdrawal will count as an early distribution,
and you’ll owe taxes and a penalty on that money.
The same problem can crop up if you’re transferring
money in an
IRA
from one provider to the next and
the former provider cuts you a check.
The Avoidance Tactic:
The best way to ensure you
don’t trigger taxes and early-distribution penalties
on an
IRA
or
401
(k) rollover is to have the custodians
of those accounts deal directly with one another on
the transaction, rather than receiving the check your-
self. Most providers—especially the one that’s
receiving the new assets in its coffers—will make
the process fairly seamless. That way, you won’t
risk forgetting to send the check to the new provider.
Goof 5
| Triggering a Big Tax Bill on a Backdoor
Conversion
We’ve written extensively on the topic of backdoor
conversions from Traditional
IRA
s to Roth
IRA
s. In a
nutshell, the maneuver allows individuals—who
otherwise earn too much to begin a Roth account—to
get money into a Roth by funding a nondeductible
Traditional
IRA
and converting that account to a Roth
shortly thereafter. Assuming the individual has no
other
IRA
assets, the only tax due upon the conver-
sion would be any investment appreciation that
occurred between the time the account was opened
and when the assets were converted to Roth.
Individuals can get into trouble, however, if they
already have sizable
IRA
kitties—monies that
have never been taxed. When that’s the case, the
conversion of the new small
IRA
could turn out
to be a mostly taxable event.
The Avoidance Tactic:
The tax trap for backdoor
Roth conversions for individuals with large Traditional
IRA
s can be circumvented if that individual also has
access to a decent
401
(k) plan. If the plan allows roll-
overs from
IRA
s, an individual can move the Tradi-
tional
IRA
assets into the
401
(k) prior to conducting
the conversion of the new nondeductible
IRA
to
Roth. Thus, the conversion will be tax-free (or nearly
tax-free). If a rollover from the
IRA
to a
401
(k) isn’t
an option or the
401
(k) isn’t very good, individuals are
better off forgoing the backdoor Roth
maneuver altogether.
Goof 6
| Not Rolling Over a Roth 401(k) to a Roth IRA
in Retirement
One of the advantages of Roth
IRA
s is that you
don’t have to take
RMD
s. Confusingly, Roth
401
(k)s do
require
RMD
s, so if you leave your money in that
wrapper, you’ll have to take distributions. They’ll be
tax-free, but you’ll still lose an element of control
over your plan.
The Avoidance Tactic:
This is an easy one: To
avoid
RMD
s from a Roth
401
(k), roll the money
over into a Roth
IRA
, which doesn’t require
RMD
s,
before
RMD
s commence.
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Contact Christine Benz at
