The 6 Most Common Mistakes

made by IRA owners and their beneficiaries

1: Failing to take a Required Minimum Distribution

In this case there will be a 50% Excise Tax in addition to the income tax. Let's assume the RMD for this year is $10,000 and the owner fails to take the distribution. One half of the distribution, $5,000 will be the penalty or Excise Tax. About another $3,000 will be the income tax on the failed distribution. Together that amounts to $8,000 out of the $10,000 distribution going to the IRS.

2: Failing to properly Designate Beneficiaries

Only a properly Designated Beneficiary has the right to stretch the distributions of an inherited IRA over their individual life expectancy. If the beneficiary is not properly designated they may have to pay all of the taxes on an inherited IRA over the remaining life expectancy of the deceased IRA owner. The longer the distributions can be stretched, the longer the beneficiary can continue to earn interest on what otherwise would be paid to the tax man prematurely. Using a will or estate does not properly establish Designated Beneficiaries.

3: Failing to establish "Separate Accounts" for each beneficiary
If Separate Accounts with separate beneficiaries are not established, the life expectancy of the oldest beneficiary will apply to all beneficiaries. The life expectancy or payout period of a 25 year old beneficiary, according to IRS Publication 590, is 58.2 years. For a 55 year old beneficiary it's only 29.6 years. Without separate accounts, both beneficiaries will be treated as if they were age 55. This will greatly shorten the pay out period and tax deferral period for the younger beneficiary. There is excellent IRA beneficiary documentation that automatically establishes separate accounts at the death of the IRA owner. Several insurance companies have adopted this important separate account language in their Beneficiary documents.

4: Beneficiaries failing to take their first distribution by Dec. 31 of the year following the year of the IRA owner's death
This mistake can have tragic tax consequences. IRA owners can wait until April 1 of the year following the year in witch they turn 70 � to take their first required distribution. This is called the "Required Beginning Date". Beneficiaries who inherit an IRA are required to take their first required minimum distribution by December 31 of the year following the year of the owner's death, with out respect to the age of the beneficiary. This is an easy date to miss and is missed often. If the beneficiary fails to take the first distribution before the deadline, the entire account could be subject to taxation. Proper advanced IRA distribution planning can help beneficiaries avoid this problem.

5: Not having a formal distribution plan
This can result in confusion and tax tragedy. Providing the custodian of your retirement accounts with clear and written instructions will help you avoid missing important dates and deadlines. If your current advisor is not trained in the new IRA distribution rules it's time to find a new advisor. Make sure your advisor has a working knowledge in IRS Publication 590.

6: Having too much of your savings at risk in the Market
If you will need your retirement saving soon or if you're over 70 � and are required to take distributions, a drop in the market is a drop in your income. Financial planning 101, if you're over 65 it is prudent to have no more than 30% of your IRA at risk in the Market. 2008 is a good example why!