Q&A

Q&A: Switch to electronic documents

April 25, 2022 By Liz Weston

Dear Liz: I have to disagree with your suggestion to switch to electronic documents versus using the U.S. mail. People need to keep an eye on dubious actors like cable and cellphone companies, where it’s important to pay attention to sneaky new charges or “expiring discount rates.” The same is true for credit cards, where fraudulent charges are likely to appear. I know I will open and read a bill in the mail while email is much more likely to be deleted unread. It’s a personal preference, but I think it’s sound financial discipline. Also, good luck trying to refinance or get a loan using e-statements — lenders refuse them.

Answer: Your last statement may have been true for some lenders before the pandemic, but the financial industry was rapidly digitizing even before the lockdowns began. After all, uploading electronic documents is much faster and more secure than relying on the mail. Our last refinance was handled entirely electronically, although we did have to sign a few closing documents in person with a notary who sat six feet away on our porch. Even if our lender had asked for a paper copy of an electronic document, though, that wouldn’t have been a problem: That’s what printers are for.

If you’re in the habit of scrutinizing paper bills while ignoring your email, switching to electronic documents can be tricky. Some people use personal finance apps to help them monitor what’s happening in their accounts while others put reminders on their calendars to review their transactions.

Reminders also can help you avoid paying more when you take advantage of a limited-time offer, such as an introductory rate for a service or a teaser rate on a credit card. Put the expiration date on your calendar as a prompt to renegotiate with the company or find another deal.

Simplifying your finances also can help you more easily spot fraud and unnecessary charges. It’s easier to monitor one checking account, one savings account and one credit card than a bunch of accounts spread across multiple companies.

Of course, there will be some people who simply can’t change the habits of a lifetime. For those who can, though, electronic documents are the way to go.

Q&A: Leaving IRAs to charity

April 18, 2022 By Liz Weston

Dear Liz: In responding to the reader who asked how to plan around the tax consequences of leaving a traditional IRA to a family member, I wish you had mentioned the tax benefit of naming a charity as the beneficiary of a traditional IRA. There is no tax on the distribution of a traditional IRA to a charity. The consequence is that the income is never taxed (on the front end or back end) and a charity benefits from the IRA owner’s generosity.

Answer: The reader was primarily concerned with bequeathing assets to children and grandchildren after the Secure Act of 2019 did away with “stretch IRAs” for most non-spouse beneficiaries. One way to do that while also benefiting a charity is the charitable remainder trust that was mentioned in the column. These trusts require some expense to set up and aren’t a good option if the IRA owner isn’t charitably minded.

If someone’s primary goal is to benefit the charity, however, then qualified charitable distributions or outright bequests are certainly an option. Qualified charitable distributions, which can begin at age 70½, allow someone to donate required minimum distribution amounts directly to a charity; the distribution isn’t counted as taxable income to the donor.

Q&A: Retirement account distribution rules

April 18, 2022 By Liz Weston

Dear Liz: My husband is 71 and retired. We have started withdrawing from one of his retirement funds but I am unsure if there is a minimum amount that needs to be withdrawn per year. We have a few retirement funds in different places. Do we have to withdraw from each or just a minimum per year no matter where?

Answer: Required minimum distributions from most retirement accounts typically must begin when someone turns 72. The withdrawals must be made by Dec. 31 each year, but your first one can be delayed until April 1. If your husband turns 72 next year, for example, then the first withdrawal wouldn’t be due until April 1, 2024. Your husband would need to take a second distribution by Dec. 31, 2024.

Required minimum distributions are calculated using the tables in IRS Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs). IRA owners have to calculate the minimum withdrawal separately for each IRA they own, but they’re allowed to draw the total amount from one or more of the IRAs. People who have 403(b) accounts are also allowed to take the total amount from one or more 403(b) contracts after calculating the amount separately for each one.

The rules are different for other types of retirement plans. People who have 401(k) and 457(b) plans must calculate and take minimum withdrawals separately from each of those plan accounts. No distributions are required for Roth IRAs during the owner’s lifetime.

Your brokerage typically can help you calculate required minimum distributions, or you can talk to a tax pro. A tax pro or fee-only financial planner also could help you decide if it makes sense to consolidate your accounts. At your stage of life, you probably could benefit from simplifying your finances and having fewer accounts to monitor.

Q&A: When a full-service brokerage doesn’t want your business anymore

April 18, 2022 By Liz Weston

Dear Liz: Can a brokerage firm drop a 26-year customer because their account falls below $200,000? I have been told that they don’t normally have accounts under that limit. Of course, my balance is lower because of the market slide. This policy doesn’t seem very ethical. Ten years ago, I had another account with them and it fell below $100,000 and nothing was said about that.

Answer: Your full-service brokerage may have just done you a favor. After charging you high fees for years, it has set you loose to find an alternative that will cost you much less.

Discount brokerages such as Vanguard, Fidelity, Charles Schwab and T. Rowe Price will welcome your business. You also could explore robo-advisory options that manage your money for a fraction of what you’re paying now.

Q&A: The rules have changed on inherited IRAs. Here’s what you need to know

April 11, 2022 By Liz Weston

Dear Liz: My husband and I have a combination of traditional and Roth IRAs naming our children and grandchildren as beneficiaries. With the passage of the Secure Act requiring distribution of inherited IRAs within 10 years, we want to revise our plan of leaving all of the investments to our children, as such inherited income would affect their tax bracket also. Do you have recommendations to alter the inherited IRAs to avoid this issue? Our annual fixed income puts us at the top of our tax bracket, meaning we usually cannot manage a traditional IRA to Roth conversion.

Answer: The Secure Act dramatically limited “stretch IRAs,” which allowed people to draw down an inherited IRA over their lifetimes. Now most non-spouse inheritors must empty the accounts within 10 years if they inherited the IRA in 2020 or later.

There are some exceptions if an heir is disabled, chronically ill or not more than 10 years younger than the IRA owner, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. These “eligible designated beneficiaries” can use the old stretch rules, as can spouses. Minor children of the IRA owner can put off withdrawals until age 21. At that point, the 10-year rule applies.

If you had a potential heir who qualifies, you could consider naming them as the beneficiary of a traditional IRA and leaving the Roth money to the other heirs. (The IRA withdrawals will be taxable while the Roth withdrawals won’t.) Or you could leave the IRA to the children in lower tax brackets and the Roth to those in higher tax brackets.

If you’re trying to divide your estate equally, though, these approaches could vastly complicate matters because the balances in the various accounts could be quite different. Plus, predicting anyone’s future tax brackets can be tough.

Another approach is to name your children along with your spouse as the primary beneficiary of your IRA. That way, the children would get 10 years to spend down this first chunk of your IRA money after you die. When your survivor dies, they would get another 10 years to spend down the remainder, giving them 20 years of tax-deferred growth.

Alternately, you could focus on spending down the IRA to preserve other assets for your kids. The stretch IRA rules encouraged people to preserve their IRAs, but now it may make more sense to focus on passing down assets such as stock or real estate that would get a valuable “step up” in tax basis at your death.

Converting IRAs to Roths is another potential strategy for those willing and able. In essence, you’re paying the tax bill now so your heirs won’t have to pay taxes later (although they’ll still have to drain the account within 10 years). It may be possible to do partial conversions over several years to avoid getting pushed into the next tax bracket.

There are a few other approaches that involve costs and tradeoffs, such as setting up a charitable remainder trust that can provide beneficiaries with income. These are best discussed with an estate planning attorney who can assess your situation and give you individualized advice.