The Grinch Recommends 3 IRA Tax Schemes…that DON’T Work!
By Andy Ives, CFP®, AIF®
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It turns out the Grinch stirs up a blizzard of trouble beyond stealing Christmas trees and presents from the innocent Whos down in Whoville. That candy cane he slipped out of Cindy Lou’s fingers? Child’s play. The breadcrumb he stole from the hungry Who mouse? Just the tip of his naughty iceberg of misdeeds and bad retirement advice.
He’s an account-churning, RMD-avoiding, tax-scheming thief!
An excess-contributing, high-pressure selling, rollover cheat!
Oh, you ARE a mean one, Mr. Grinch.
In an effort to protect the other Whos in Whoville, we share the top 3 most foul Grinch-recommended year-end IRA strategies that unequivocally, unmistakably and inevitably will NOT work:
1. Changing an IRA beneficiary at year-end to reduce an RMD
Robert Who was 72, and his wife was just 48.
Robert Who knew, that his RMD was due,
But the Grinch had a plan to initiate.
Robert chose someone other than his spouse as his named beneficiary, and all parties were agreeable. Robert Who was correctly using the Uniform Lifetime Table to calculate the required minimum distribution (RMD) from his IRA. The Grinch suggested Robert Who temporarily change his beneficiary to his 48-year-old wife on December 31, leverage the Joint Life Table to calculate his RMD, then switch his beneficiary back to the original non-spouse. Using the Joint Life Table, the Grinch reasoned, would increase Robert’s life expectancy factor, thus reducing his RMD.
Alas, the Grinch’s strategy was a failure. In order to use the Joint Life Table, the spouse must be the sole primary beneficiary of the IRA and named as such for an entire year.
2. Withdrawing funds from an IRA in December, holding the funds “in limbo,” then rolling the same dollars back into an IRA in January to reduce or eliminate the RMD
Larry Who had a million in cash,
Stashed in an IRA at Who Bank.
“Take the money in December,
Roll it back in a month,
And the Grinch is who you will thank!”
The Grinch believed that if Larry Who reported a zero balance in his IRA on December 31, then there would be no way to calculate an RMD the following year. While creative, this is more disastrous logic. Larry is ultimately responsible for taking his RMD. The rules require him to adjust his December 31 prior-year balance to include any outstanding rollovers or transfers. Failure to withdraw the proper RMD would result in a 50% penalty of the RMD not taken.
3. Completing an IRA rollover late one year, then doing another rollover soon after the calendar changes.
Poor Mary Who,
Knew not what to do,
With two of her IRA accounts.
“Roll one to me,”
Sneered the Grinch wickedly,
“The IRS is wary to pounce.
Roll the other one here,
After the turn of the year,
And I’ll guarantee your check will not bounce.”
Mary Who sought a second opinion, and it was fortunate she did. Had Mary followed the Grinch’s advice, it would have been a fatal error, with no means of correction. Mary Who’s first rollover, deposited before the end of the year, would have been allowed. However, her second rollover – even though it was from a different IRA – is not permitted. The rule is one rollover per 365 days, not one rollover per calendar year. Mary Who’s second rollover would be treated as a distribution, resulting in taxes due and penalties if she were under 59 ½. (Had the Grinch succeeded in completing Mary Who’s illegal second rollover, it would be treated as an excess contribution and create an entirely new tangle of Christmas lights.)
Tax time approaches,
Grinches scheme and they plot.
Follow the rules,
For the IRS water is hot.
Tis the Holiday Season,
From the West to the East.
Seek out sound guidance,
And enjoy your roast beast!