Announcer:
It is time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representatives securities offered through Cambridge Investment Research, Inc., a broker/dealer, member of FINRA/SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now here’s today’s financial focus program.
Nate Kreinbrink:
Good morning and welcome to this week’s Financial Focus brought to you each and every Wednesday morning right here on KROS. Well, this is Nate and Andy, or I’m sorry, Nate and Mike this morning.
Mike Steigerwald:
I’m much more handsome.
Nate Kreinbrink:
These weeks are running together. We had Andy on last week talking a little taxes with it. And again, Andy was kind of throwing out some ideas when you and I were going over the show yesterday about what to go over. So I guess I just had his name still in my mind, fresh in my mind.
Mike Steigerwald:
That’s quite okay.
Nate Kreinbrink:
So again, first week, kind of the first show of February that we’re doing. Year’s moving right along. We’ve got some representation in the state wrestling as the wrestling tournament gets underway as people head out to state and want to wish best of luck to each and every one of those as they continue on the tournament trail. Basketball for girls and boys will be kind of winding up next week and then they hit their second season. So kind of an exciting time with that.
Mike Steigerwald:
Oh, yeah, playoff time is always great. Tournament season is a lot of fun and good luck to all the athletes out there.
Nate Kreinbrink:
Yeah, again, doesn’t matter what your record is, everybody starts fresh and [inaudible 00:01:56]
Mike Steigerwald:
Anything can happen in one game.
Nate Kreinbrink:
So today’s show, we tossed around a bunch of different ideas and one topic that came up and we’ve dealt with a couple of our meetings in the last week or two is when you inherit a retirement account and you are a non-spouse. So again, if you’re a spouse and your spouse passes away, you can inherit that retirement account, whether it’s an IRA, a Roth 401k, 403B, basically as if it was your own. So if you’re not of age again, it just basically treats it as it is your own retirement account. Where the differences come into play is when you inherit a retirement account and you are not a spouse of the person who passed away. Rules become a lot different, and I think that’s where confusion comes into play a lot of times.
Mike Steigerwald:
Yes, certainly Nate and these sets of rules have changed quite a bit over the last few years. Finally landed now where IRS has provided more clarity around the guidelines and what they really mean. So yes, inheriting an IRA as a non-spouse will be… The rules that you have to play by will be dependent on the situation of when you inherited it. So if the person who passed away that you inherited this from had already begun taking their RMDs, their required minimums that the IRS says you have to start taking, then you need to continue taking those. That rule has changed. So that is different than in years past. So bottom line, it comes back to, pretty consistent theme on our programs here, is it is all situationally dependent. What is happening in your exact situation is going to be different than what’s happening from your neighbor or cousin or brother, co-worker, etc. So just to know that these rules have changed and seeking some guidance is probably a good path to go down.
Nate Kreinbrink:
And I think it’s still important to remember though, that there are some planning situations that you can still take advantage of. So even though you have to take out a little bit each year, it’s roughly again, ballpark ish, 4 or 5% that you have to take out on a given year. Obviously with the ten-year rule, having to take that out again, you take out 4 or 5%, you’re not going to take it all out within those 10 years. So you’re going to have some heavy years to do it. So again, if you’re looking at retirement in a couple of years, your income is going to go drastically lower. Again, you can still take out what you need to each year, satisfy the RMD that you have to take out, but then yet still kind of defer the bulk of that retirement asset to years when you have lower income, again, essentially paying less in tax.
And I think when you look at some of this stuff, again, when you have these retirement assets essentially dumped in your lap, again, you want to look at it and say, okay, what is the best route to kind of unwind these things? And that’s where the planning comes in. That’s where the coordination with any other asset, with any other income, with any other pension, with any other thing that you may have. Again, how can we put all these pieces on the table and effectively, again, maximize what we are getting, at the same time paying less in tax.
Mike Steigerwald:
And that’s something again, that goes back to acting in the moment when this happens and you find yourself in this situation. Would be very easy to just move forward and, okay, I’m going to take the whole thing or however people may think of this. But the bottom line is there are, as you mentioned, Nate, strategies that can be in play here to help limit the amount of money you’re sending to Washington and keeping more in your own pocket. And I think that’s where people need to just seek that advice, especially in this ever-changing segment of rules that, again, over the past several years have changed quite a bit. Now we have much more clarity around this and can offer some advice to specific situations.
Nate Kreinbrink:
And I think when you do this too, again, saying you inherit retirement account from a non-spouse, I think it’s important too to just kind of realize what the consequences are for how you accept that money as well. There’s a lot more companies that aren’t processing those rollovers or taking care of those over the phone anymore. They’re essentially sending you out a packet of forms that you have to fill out and send back in. So again, if you’re not getting help or if you don’t understand that, you could potentially check a box and cash it out thinking you are doing the right thing. But essentially taking that all on if it’s a tax-deferred account as income in that one year. And again, with these forms that are coming out, the companies that are holding the plans are basically putting the responsibility on the person, the beneficiary. And again, if you do not know what it is you’re taking, you’re just like thinking, oh yeah, just pay it to me. I don’t want to put it into a different account.
Mike Steigerwald:
I don’t have another account.
Nate Kreinbrink:
I don’t necessarily understand what it is. They ask you if you’ve seen the tax document in the last 90 days. Again, you need to make sure you understand all those things. But again, understanding what box you check, what the impact is going to have, again, could save you a lot of money in taxes. And that’s-
Mike Steigerwald:
Oftentimes those decisions, as we stated, are irrevocable. I mean, you check that box, send it back to the plan administrator, they are processing that and that’s it. I mean, you get a check and there’s no going back. So certainly again, having a full understanding of what you’re doing when you find yourself in this situation is very, very important.
Nate Kreinbrink:
And again, when we switch gears a little bit and focus from inherited IRAs, 401K’s, to, again, people’s own 401K, 403B plans. Again, if you retire and you are going to roll that company plan out of the company plan into a traditional IRA, a Roth IRA, depending on what type of account you have, again, if you have any loans that still remain on that company plan, it will be treated as a distribution in the year that you roll that money over. So essentially it’s going to be taxable. And if you are below the age of 59 and a half, there’s going to be a 10% penalty that’s going to be applied to any amount on that loan that you currently still have. And again, it satisfies the loan anymore, you don’t have that loan anymore. But again, you are treating that as income in the year that you take the money out of your company plan. And again, if you’re under the age of 59 and a half, there will be a 10% penalty on top of that.
Mike Steigerwald:
Certainly more stuff to be aware of in these situations. The other thing that just reminded me of there, Nate, is even the rules sets of having your own IRA or 401k, the RMD rules have changed in there over the last several years as well. So for a long time, 70 and a half, at that point, you start taking money out. Well now then they increase it. And depending on when you were born, that rule set may have changed too, over the last 3, 4, 5 years. So again, something to be aware of. A lot of people have it set in their mind that this is what the rules are, but again, it’s an ever-changing landscape where we stay on top of it and really have to portray that to our clients.
Nate Kreinbrink:
And I think it all boils down to is again, planning. Again, we talk planning all the time. The earlier you come in and we put together a plan, put together a road map to again, just say, hey, this is what we are looking at and these are the steps that are going to do that, as opposed to coming in a month before you’re looking to retire and be like, yep, I’m done. Well, there’s not a whole lot of changes that we can make or things to take advantage of in that short amount of time. So whether it’s coordinating your social security benefits, whether it’s coordinating a pension, whether it’s coordinating any Roth conversions, contributions, whatever the case it may be. Again, the earlier that you can have a plan in place, the more confident you’re going to feel when you finally do make that decision.
Mike Steigerwald:
And to your point, having that runway of opportunities to make changes and adjustments to your plan, easier to do when you have that longer runway.
Nate Kreinbrink:
Exactly. So again, before we run out of time, I did want to mention that every Friday, Nelson Corp Wealth Management is wearing jeans for charity. Money raised in the month of February will be donated to the therapy dog program at the Clinton Public Library. I made it.
Mike Steigerwald:
You did it.
Nate Kreinbrink:
I did it.
Mike Steigerwald:
Sounds good.
Nate Kreinbrink:
Again, this is Nate and Mike bringing you this week’s financial focus. Thanks for tuning in and have a great rest of your week.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research, Inc., a broker/dealer, member of FINRA/SIPC. Investment advisor representative, Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.