Financial Planning Hawaii's "Catch of the Day"!Submitted by Financial Planning Hawaii on August 6th, 2015
The biggest financial planning mistakes and omissions people make often have nothing to with investments. It is increasingly common in my practice to encounter people who have retired only to rejoin the work force shortly thereafter, not out of financial necessity, but rather because they miss the intellectual and social stimulation of their professions. Such was the case with a husband and wife client who, after retiring in their early 60s, both returned to full-time gainful employment less than two years hence. At a recent review meeting the couple, now in their late 60s, lamented that they will be forced to take significant required minimum distributions from their traditional IRAs at age 70 ½. This is a problem, because, since they are working full time in high-paying jobs, the IRA distributions will be taxed at the highest marginal federal tax rates. Fortunately, a solution was at hand thanks to a little known IRS rule that exempts people who are still working and participating in an employer sponsored retirement plan (e.g., 401(k), 403(b), 457 plan, etc.) from the mandatory distribution requirement for assets held in the plan. While the “still working exception” does not exempt participants from RMDs on separately held IRAs, plan portability rules permit participants to transfer existing traditional IRA monies into their employer sponsored plans (so long as the plan document permits such transfers). By transferring all of their IRA monies into their respective employer sponsored plans, this couple will now be able to entirely avoid their RMDs for as long as they continue to work. [Note: The “still working exception” does not apply to plans in which the participant owns 5% or more of the company.] As confirmed by the clients’ accountant, this "reverse rollover" maneuver will likely save them tens of thousands of dollars. Raising client awareness of the such possibilities makes for strong advisor-client relationships and is a big part why I enjoy coming to work each day.