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FAs Are Making Critical Mistakes in IRAs, Expert Warns

By Garrett Keyes November 12, 2018

FAs can make critical mistakes when it comes to the implementation and offering of IRAs, but some problems are more common than others, Jeffrey Levine, director of financial planning for BluePrint Wealth Alliance, claimed during the Schwab IMPACT conference last month. Most importantly, some of these mistakes can lose money for clients. Here are the common errors Levine says advisors are making with IRAs:

Improperly using Qualified Charitable Distributions

Required Minimum Distribution requirements are the amount IRA plan participants must continually withdraw starting the year in which clients turn 70 ½ years old. Levine said QCDs can be used to satisfy RMD requirements, especially in light of recent Trump-administration tax changes. The Trump tax changes increased the standard deduction investors can receive from charitable giving, Levine said.

Misunderstanding bankruptcy laws

Clients filing for bankruptcy have unlimited financial protection under the law, but some FAs don’t know that retirement plan assets rolled to IRAs also have uncapped protection under bankruptcy, Levine said. When FAs move assets to an IRA pool, that pool automatically has bankruptcy protection too, he says. Specific laws vary from state to state but many FAs may not know these protections exist, he claimed.

Incorrectly counting life expectancy

After the original owner on an IRA account dies, some FAs will annually recalculate the RMD rate for whomever inherited the account, Levine said. But advisors would save their clients money if they did this calculation just once. “The period locks in after the first calculation and you don’t use the table year-over-year,” and that can add cost, he said.

Misinterpreting how a spouse should inherit an IRA

99% of the time advisors should have a spouse inherit their partner’s IRA by rolling it over after the partner dies, Levine said. Spouses of deceased IRA holders can treat the account as their own, do a spousal rollover, or continue as if they are the spouse themselves, he said. By using the rollover strategy, costs can be minimized, he claimed.

Misunderstanding qualified longevity annuity contracts

QLACs are a new type of annuity that can be used for long term retirement planning and can be a powerful strategy because the products provide clients with month-by-month cashflow in retirement, Levine said.

Incorrectly using a trust as the beneficiary

Levine has seen more trusts as beneficiaries fail than succeeded, he said. Very conservatively 85%-90% of the trusts his firm has reviewed have failed, he claimed. And while some attorneys are good at setting up trusts as beneficiaries, without due diligence, advisors might not be in a position to know which attorneys are good at constructing trusts, and which are not, he said.

Not fixing advisor errors

If an FA makes a mistake with their clients, it’s always important to fix it as soon as they become aware, he said. If an advisor is filling out forms for different clients every year without the proper checks in place, the advisor is at risk of making mistakes, he said. And those mistakes can come back to haunt FAs in the long run, because some mistakes can have legal consequences -- and some offenses have no statute of limitations, he said. For example, FAs can forget just one signature regarding required minimum distributions involved in moving an IRA to a Roth IRA, as was the case in Paschall v. Commissioner, a 2011 suit brought by the Internal Revenue Service, Levine said. In that case the respondent's mistake ended up costing his client $425,000.