Most of the work we do centers around retirement and estate planning. What we often find is that many people don’t realize that IRAs are very different from all their other assets. I generally work to reduce or eliminate them in retirement. IRAs are a great savings vehicle. Unfortunately, they can be equally as bad in retirement itself or upon your passing. This is why I often tell clients that what got them to retirement (i.e., focusing on low-cost, well-diversified investments) won’t get them through retirement.
If IRAs are so great, then what’s the problem with them in retirement? Well, here is a list of issues with IRAs.
During your lifetime:
1. IRAs have required minimum distributions, which force you to take out money even if you don’t want to.
2. IRA gains are subject to ordinary income tax, not capital gains like other investments.
3. IRAs can’t be transferred to a trust or gifted to someone during your lifetime. There are limited exceptions, such as to a charity via a Qualified Charitable Distribution or via a court order, such as a divorce, known as a Qualified Domestic Relations Order (QDRO).
4. IRAs cannot be owned jointly like other assets, even in a community property state, nor can you change the ownership of an IRA.
5. IRAs can sometimes be subject to tax penalties, unlike other assets.
Upon death:
1. IRAs pass via contract, not by your will. So, they have to be carefully planned for, or your entire estate plan could be different from what you intended.
2. IRAs do not receive a step-up in basis like other assets upon your death.
3. IRAs can be highly taxed both during life and upon death.
4. IRAs can be subject to double taxation if your estate is above the current estate tax limit.
5. IRAs have very unique distribution rules, depending on the type of beneficiary that receives them.
6. IRAs left to a trust may not be distributed as planned under the SECURE Act changes.
Regular assets are not subject to most of these issues, so it is very important that you discuss what to do with IRAs with your financial advisor. Personally, I like as few complications in retirement as possible. I also like to leave beneficiaries the best possible assets to inherit from a tax and flexibility standpoint. That’s why I often look to reduce the impact that IRAs can have both during your lifetime and upon your passing.
Securities are offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services are offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS, visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
