The Yearly Must-Do: Review Clients’ Retirement Accounts

Although it’s best practice to monitor clients’ retirement accounts throughout the year, many advisors are guilty of leaving certain annual tasks for the last minute. To help ensure the alignment of plans and objectives, advisors should take the time to periodically review clients’ retirement accounts—in particular, their beneficiary designations, current contributions, and distribution requirements.

Clients often don’t remember to review beneficiary designations, which can result in some distinct challenges in dealing with the estate if they pass unexpectedly. It’s imperative that clients review beneficiary designations after experiencing a life-changing event.

• If a child is born, a client may want to add the child as a contingent beneficiary. This way, if the primary beneficiary (perhaps a spouse) doesn’t need the money, he or she can disclaim the assets so that they go to the child. If existing children are primary beneficiaries, the new addition to the family should be included in the inheritance.
• If a client has divorced and remarried, he or she should change the beneficiary immediately. In the event of the client’s death, his or her ex-spouse may be entitled to the assets if that individual is still the primary beneficiary on file. This may be different for a qualified plan versus an IRA, but it’s still important to secure the proper spouse beneficiary in either scenario to avoid future complications.
• If a beneficiary on file predeceases the owner and no other primaries or contingents exist, the beneficiary will most likely default to the client’s estate (or spouse in the case of a qualified plan). Although having an estate beneficiary isn’t the worst option, it may not get the assets to where the deceased individual intended them to go, and distribution options are more limited.

It’s common for a client’s estate planning needs to change with time, so be sure to reevaluate these needs every so often and adjust beneficiary designations accordingly. As spouses or children age or financial circumstances change, the need for an inheritance may change, too.

Income limits may restrict IRA contributions, so it’s common for an individual to wait until the end of the year to determine his or her income before making a contribution or correcting an excess one. This is perfectly acceptable; however, be aware of the deadlines for these transactions to ensure that your client is maximizing his or her retirement savings options.

• Traditional and Roth IRAs: Clients can contribute a maximum of $5,500 ($6,500 if age 50 or older) to their traditional and Roth IRAs in 2018. The deadline to contribute is an individual’s tax-filing deadline, not including extensions (generally April 15). Clients cannot make a prior-year IRA contribution after the tax-filing deadline, even if they have filed for an extension.
• SEP IRAs: Contributions to SEP IRAs cannot exceed 25 percent of compensation or $55,000 in 2018. The deadline to establish and contribute to a SEP IRA is the employer’s tax-filing deadline, including extensions. Self-employed business owners should be especially cognizant of this deadline, since many choose to establish and contribute to an employer-sponsored retirement plan only after they’ve determined their income for the year. SEP IRAs are generally the only option left after year-end, as the other popular option—a solo 401(k)—has an establishment deadline of the business’s fiscal year-end (generally December 31).
• SIMPLE IRAs: Employees age younger than 50 can contribute up to $12,500 in 2018; those age 50 and older can make an additional $3,000 catch-up contribution. Employers must match deferrals dollar-for-dollar, up to 3 percent of compensation, or make a 2-percent nonelective contribution to all eligible employees. For employers, the deadline to contribute to a SIMPLE IRA is the employer’s tax-filing deadline, including extensions. Employers, however, must deposit employee contributions no later than seven days after the salary deferral is made.

If an individual contributed to the IRA throughout the year and determined he or she made an excess contribution, the deadline to correct it would be the tax-filing deadline, including extensions. This correction process includes removing the excess contribution with any earnings by the deadline in order to avoid a 6-percent excise tax.

When an individual reaches age 70½, he or she is required to begin taking required minimum distributions (RMDs) from his or her IRAs (except for Roth IRAs). For qualified plans, if the participant is still working and does not own at least 5 percent of the business, he or she can defer the RMD until the year of retirement (if the plan allows for it). IRA owners and participants are generally required to take RMDs by December 31 of the year in which they are due or face a 50-percent penalty on the amount that was not distributed.

Individuals taking their first-year RMD have the ability to defer the first payment until April 1 of the following year. This strategy can present both benefits and drawbacks depending on the scenario. For example, if a client has a significant amount of income in the year the RMD is due but anticipates he or she will have much less income the following year, deferring a first-year RMD could lessen the tax burden (but keep in mind two RMDs will need to be taken that year). Or, if a client’s portfolio is doing significantly well, deferring a first-year RMD could provide the client with the potential for additional investment gains.

One of the downsides associated with deferring a first-year RMD is forgetting to take the RMD altogether, which can result in the 50-percent penalty mentioned above. Another potential problem has to do with rollovers and conversions. Clients often don’t realize that RMDs are ineligible for these transactions. If a client has not satisfied his or her RMD in the year it’s due and attempts to do a rollover or conversion, he or she may inadvertently roll over or convert the RMD. The client would then have to remove the RMD amount as an excess contribution from whichever IRA it went into.

By following these best practices and making it a point to review clients’ retirement accounts annually, you can help ensure that your clients haven’t overlooked key details and that those who stand to inherit their assets are also in good shape for the future.

What else do you keep an eye out for when you review clients’ retirement accounts? Are your clients able to successfully maximize their contributions each year? If not, what’s getting in the way? Share your ideas below!