Ask Liz Weston

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Retirement

Q&A: How to protect QCD checks from mail theft

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Dear Liz: In response to a reader whose check to the IRS was stolen from the post office, you (again) warned readers that mail theft and check fraud have soared and that electronic payments are now the safest way to send money.

I’ve been making my charitable donations using qualified charitable distributions from my IRA. My brokerage does this by mailing me a check in the amount I request, payable to my charity. I then mail the check to the charity.

It seems risky, but it is the only way I can use the QCD option to donate untaxed dollars. Is there a safer way to do this?

Answer: You’ve touched on an unfortunate reality. People are being warned not to mail checks because of rampant theft, yet brokerages still rely on sending physical checks for certain transactions such as qualified charitable distributions or 401(k) rollovers.

Since you can’t eliminate the risk with electronic transfers, see if you can eliminate at least one trip through the mail. Ask if the brokerage will mail the check directly to the charity, rather than sending it to you first. If that’s not an option and the charity is local, you could hand-deliver the check.

Another possibility is to find out if your IRA offers check-writing privileges. If it does, you could write the check directly to the charity. Use indelible black gel ink, which is harder to remove than regular ballpoint ink, and consider sending the check by certified mail so you can track its delivery.

You also should closely monitor your account to make sure the check gets cashed. IRA checkwriting agreements can require customers to report missing or fraudulent checks promptly. Waiting too long could jeopardize your ability to recover a loss.

As you know, qualified charitable distributions allow people 70½ and older to transfer money directly from an IRA to an eligible charity without including the distribution in taxable income. To count for that tax year, though, an IRA check must clear by year-end. Make sure the check is sent before December to leave plenty of time for the charity to receive and deposit it.

Q&A: Does an inherited Roth IRA get a new 10-year deadline?

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Dear Liz: I recently inherited a Roth IRA. If I understand correctly, I can leave the money in the IRA for 10 years. If I die before then and my adult son inherits the account, does he then get an additional 10 years to do something with the money?

Answer: That depends on the circumstances.

If you inherited this Roth IRA from your spouse, you can use your own life expectancy to calculate required minimum distributions, Luscombe says. If you die before emptying the account, your son typically would get 10 years from the date of your death to drain it.

The same rules apply if you are otherwise an “eligible designated beneficiary,” which includes disabled or chronically ill people and those who are not more than 10 years younger than the original Roth IRA owner.

If none of the above exceptions apply, however, you must empty an inherited Roth IRA by Dec. 31 of the 10th year following the original owner’s death. If you die before then, your son inherits your deadline along with the account. He doesn’t get a new 10-year period but must withdraw the money from the Roth by the same deadline that applied to you.

Q&A: Can Roth conversions help reduce the widow’s penalty?

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Dear Liz: The letter writer who asked about Roth conversions should also consider that they or their spouse will eventually be a widow(er) and will be subject to the income tax “widow’s penalty.”

Roth conversions now protect the survivor against some of that tax bite.

Answer: The widow’s penalty refers to the higher financial burden many survivors face after losing a spouse as they change from “married filing jointly” status to “single” status.

While their incomes may drop, their taxes and other costs may rise.

Having at least some money in a tax-free account can help with this as well as a number of other situations in retirement, which is why it’s important to fund a Roth account during your working years if you can.

The main downside to Roth contributions is that you don’t get an upfront tax break for making them.

Conversions, though, are more complicated.

They trigger a tax bill and can have ripple effects, such as reducing eligibility for tax credits, financial aid or health insurance subsidies.

Late-in-life conversions can increase Medicare premiums and cause more of your Social Security checks to be taxable. That’s why conversions should only be considered after careful consultation with tax pros.

Q&A: What to do when you missed years of inherited IRA distributions

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Dear Liz: I inherited my father’s IRA through a trust in 2010. Unbeknownst to me at the time, I’ve now found out I should have taken that money out over the following years, but I didn’t.

I turned 73 in May of this year, and I’d like advice on what I should do with that account.

Answer: Get thee to a tax pro. You’ve got some distributions to make, taxes to pay and penalties to mitigate.

Today’s rules for inherited IRAs require most non-spouse beneficiaries to empty the accounts within 10 years, thanks to the SECURE Act of 2019.

Before that, most beneficiaries could spread required minimum distributions over their own lifetimes.

Depending on the type of trust, you might have been required to take RMDs at the same pace your father was taking them. But either way, distributions were supposed to be made.

You (or better yet, your tax pro) will need to reconstruct the distributions that should have been taken since 2010, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Those distributions should be made as soon as possible, and then you (or better yet, your tax pro) can ask for relief from the possible 25% excise tax penalty that would otherwise be owed on the distributions you missed.

Your tax pro will need a copy of the trust, your dad’s date of death and the IRA’s Dec. 31 balances for every year since then.

Q&A: When a new school district has a bad retirement plan

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Dear Liz: I have taught for 22 years and recently accepted a position in a neighboring school district. I have a 403(b) retirement plan invested in a low-cost target date fund. The neighboring district’s vendor list does not include this option. Would it be more advantageous to leave my money in the current account or to roll it into a brokerage with a target date fund? If so, how do I choose what’s right for me?

Answer: As a teacher, you need to be aware that many districts’ 403(b) plans are scandalously bad. Instead of offering sensible, low-cost options, these subpar retirement plans are filled with high-fee annuities.

Your current plan is one of the better ones, since you have access to low-cost mutual funds. You can investigate the neighboring district’s plan at 403bwise.org, a nonprofit site dedicated to educating teachers about the issue. The site has reviews of many districts’ plans. If your new district isn’t included, the site has tips on how to get more information, evaluate your options and press for change.

If the new plan is a stinker, you can leave your money in the old plan, although you won’t be able to make new contributions. You also could consider rolling the account into an IRA at a brokerage. (Don’t move it to a regular brokerage account, as that would be considered a withdrawal that can be taxed and penalized.) An IRA would give you vastly more investment options, but if your 403(b) allows loans you’d lose the ability to borrow against your account. Also, workplace retirement plans such as 403(b)s and 401(k)s typically allow penalty-free withdrawals starting at age 55 if you leave your job, while with IRAs you generally must wait until age 59½.

The question remains if you should consider investing in the new district’s plan. The answer is yes if it includes any of 403bwise’s “green” rated options of low-cost funds. The answer is probably no otherwise. Teachers without good investment options should consider lobbying their district to adopt another type of retirement account, the 457(b) plan. For more information, check out 403bwise’s sister site, 457bwiser, at https://457bwiser.org/.

Q&A: Roth IRA conversions can benefit your heirs—but at a cost

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Dear Liz: I have been reading the questions about converting an IRA to a Roth and want to know how it might apply to my situation. I have been getting my required minimum distributions for a while, and I have been paying the surcharges on Medicare because of my higher income. Would it still be worth it to convert to a Roth? My children have very good income so inheriting my IRA and paying the taxes on that will probably be a burden. Thoughts?

Answer: A Roth IRA is a wonderful asset to inherit. Beneficiaries typically must empty the account within 10 years, but the withdrawals are entirely tax free.

That generosity comes at a cost, of course. You’d have to pay the taxes on any amounts you convert from your IRA, and the conversions could trigger even higher Medicare premiums. A tax pro can guide you about whether conversions make sense as well as how to do them: gradually over time or all at once.

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