© 2020 Arizent. All rights reserved.

Tax trap snares young IRA heirs: Retirement Scan

Register now

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

Tax trap snares young IRA heirs
Naming a young grandchild as beneficiary of a traditional IRA could be a wrong move, as the distributions will be subject to the "kiddie tax", according to this article on Kiplinger. While the first $1,050 of the distribution is tax-free and the next $1,050 is subject to a 10% tax, the remaining amount of the distribution will be taxed at the parent's tax rate. As such, the tax bill could be substantial especially if the distribution will be a big amount. One option to avoid the "kiddie tax" is to leave a Roth IRA, which provides tax-free distributions because the account is funded with after-tax dollars.
Getting Divorced? How to avoid tax pitfalls when splitting up retirement accounts
Couples who are about to get a divorce should have a plan on how to split up their tax-advantaged retirement accounts to avoid an unfavorable tax outcome, according to this article on MarketWatch. They should include a qualified domestic relations order in their divorce papers to ensure that their future former spouse will pay the taxes on the percentage of account balance or benefit payments that he or she collects from the retirement plan. The QDRO also enables the ex-spouse to roll over his or her share of the retirement plan to an IRA and defer the taxes on the funds. Without the QDRO, the IRS will assume that the account owners receive a taxable payout from the plan and give the money to their former spouse, leaving them entirely liable for the income tax bill.

The simple reason millennials are saving more for retirement
A study from the Bank of America Merrill Lynch has found that more millennial workers than their older counterparts are investing in their retirement savings plan, thanks to the auto-enrollment feature of these retirement accounts, according to this article on Money. "Historically, [millennials just out of college] are the folks that would have the lowest participation rate," says an expert with Bank of America Merrill Lynch. "With the use of automatic enrollment, you increase the involvement three-fold."

Retirement savers relying on rising CD rates will have to wait
Certificates of deposit are a good investment option for income-seeking retirees, as rates on these products are on the rise, according to this article on CNBC. Data from Bankrate.com show that a six-month CD saw an increase in average rate to 0.22% from 0.16% recorded two years ago. "CDs are becoming certainly viable alternatives for people who need to keep money liquid over the next one to three years. But if you're investing longer than three years out, you should take a little bit of risk," says an expert.

How to stop asking yourself the same retirement questions over and over again
Some people repeatedly ask themselves questions about retirement, a sign that they feel anxious about the unknown as well as the vague assumptions they have about the golden years, writes a contributor on Forbes. There are no right decisions, and "one thing soon-to-be retirees can do is start to take concrete steps toward creating the life they want to live in retirement," writes the expert. "That means starting to test the waters when it comes to volunteering or part-time work."

For reprint and licensing requests for this article, click here.