Our daily roundup of retirement news your clients may be thinking about.
A recent ruling by the U.S. Labor Department allows the automatic transfer of workers’ old 401(k) assets to their new plans once they change jobs, according to this article on Kiplinger. This will prevent many employees from cashing out their retirement savings, which could trigger a taxable event as well as early withdrawal penalties if they are younger than 55. “Someone with a $5,000 balance in their 401(k) might lose $1,750 as a result of an early withdrawal,” says a certified financial planner, adding that “if they don’t retire for 40 years, that money invested could have been worth $75,000”, assuming an annual rate of return of 7%.
Beneficiaries of pretax 401(k)s have the option of transferring the assets to an Inherited IRA or Roth IRA upon the original owner’s death, while those who inherited a Roth 401(k) account can roll over the funds to an Inherited Roth IRA, according to this opinion article on MarketWatch. Clients who also received after-tax 401(k) contributions from a deceased loved one as an inheritance can also move the assets to an Inherited Roth IRA, while those who are beneficiaries of an IRA and a Roth IRA can also roll over the assets to an inherited IRA and an Inherited Roth IRA. The “stretch” provisions in the tax law apply to “inherited” accounts, and all the said options except the conversion of pretax 401(k) into an Inherited Roth IRA do not trigger a taxable event.
Policymakers are mulling measures that would reduce the required minimum distributions that retirees should start taking from their tax-deferred retirement accounts when they reach 70 1/2, according to this article on Morningstar. RMDs can create an unfavorable financial situation for retirees, as these taxable distributions could increase their tax bill as well as the taxable portion of Social Security benefits. Some proposals would raise the age to start taking RMDs, while savers and retirees can use Roth accounts and conversions to minimize the amount of mandatory withdrawals from tax-deferred retirement accounts.
Seniors should ensure that they use tax-efficient strategies for tapping their retirement portfolios, and there are online tools that can be a big help for do-it-yourselfers, according to this Q&A article on The Wall Street Journal. However, a much better option is seeking professional advice, which they can get not just from a financial planner who usually charges a hefty fee. “Accountants, tax lawyers and so-called robo advisers (automated systems designed to offer financial guidance) all can help, to varying degrees, with questions about drawing down retirement savings,” according to the article.
