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Are taxes lurking in your client's tax-free retirement account: Retirement Scan

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Our daily roundup of retirement news your clients may be thinking about.

Are taxes lurking in your tax-free retirement account?
Investors can expect a tax bill from their traditional IRA or Roth IRA if they hold non-traditional assets, such as limited partnerships, operating businesses and real estate, in these accounts, according to this article on The Wall Street Journal. That is because of the Unrelated Business Taxable Income, which refers to taxable profits and losses that are passed on to these investments. IRA investors who opt for alternative assets should determine if the investments are subject to UBTI. They should also understand the tax implications, know how the taxes are reported and determine the fees involved.
Single? No children? No will? Big mistake
Clients are better off executing a will as early as possible, even if they are single and have no children, according to this article on The New York Times. Making a will is necessary to avoid any legal battles that would ensue between their possible heirs after they die and prevent losing a big chunk of their wealth to lawyers' fees and other costs. Some people see how important a will is based on their situation and here are their stories.

Ask Larry: Can I file early just for spousal benefits?
A 61-year-old wife cannot collect Social Security spousal benefit on her husband's record at age 62 and suspend her own retirement benefit, according to this article on Forbes. That is because under the Bipartisan Budget Act of 2015 retirees are born after January 1, 1954 are deemed to have filed for their own retirement benefit if they apply for a spousal benefit. Both benefits will be reduced, as she applies before reaching her full retirement age.

Can you save too much in your 401(k)?
Putting most of retirement savings in a 401(k) plan can be a wrong move, as distributions can trigger tax liability in retirement, according to this article on Nasdaq. Tax-deferred savings vehicles such as 401(k) plan are also subject to required minimum distributions when clients reach the age of 70 1/2. Retirement investors who hold most of their assets in a 401(k) are advised to achieve tax diversification by contributing to other savings vehicles with different tax treatments, such as Roth IRA.

Can I use my required distribution to fund a Roth IRA?
Retirees are not allowed to fund a Roth IRA using money withdrawn as required minimum distributions from a traditional IRA, according to this article on Money. However, they can still contribute to a Roth IRA if they are receiving a wage income from work. Those who are concerned about the tax bite on RMD may want to donate the amount directly to a charity to reduce their tax bill or instruct their custodian to withhold some amount for the tax payments. Another option is to convert some of their traditional IRA assets into a Roth to get tax-free withdrawals in the future, although the conversion triggers a tax liability.

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