Time for an IRA checkup

Steve Merrell |

Individual Retirement Arrangements, or IRAs, are a great way to save for retirement. Unfortunately, many IRA account holders put their accounts on autopilot. They fund them every year and they adjust their investments from time to time, but they rarely step back and take a careful look at how their IRAs are set up.


I recently had a very helpful conversation with Michael Jones, CPA—a local tax planning expert with a national reputation. He passed on the following tips that people should consider as they think about their IRAs. If it has been awhile since you reviewed yours, now is a good time for an IRA checkup. Here are a couple of things to consider.


First, take a look at your beneficiary designations. Are they up to date? Mistakes with beneficiary designations cause more trouble than just about any other aspect of financial planning.


A woman came to me a couple of years ago with a serious problem. Her husband of 35 years had died unexpectedly. As she worked with her attorney to settle his estate, she discovered that her husband’s IRA, worth more than $1 million, listed their three adult daughters as the primary beneficiaries. Even though his will and their trust documents indicated the IRA was to go to the wife, she was out of luck. The beneficiary designation was the controlling document. I suspect there was more to the story than she told me, but the lesson was clear: make sure your IRA beneficiary says what you want it to say.


This is especially true when the designated beneficiary is a trust. Naming your revocable trust as the beneficiary of your IRA or 401k plan may seem like a logical thing to do, but it is tricky. Unfortunately, we don’t have room in this column to get into the details of why it so difficult. However, Jeffrey Levine, a national IRA expert recently told me that 85 to 90% of the time he sees a trust designated as the beneficiary of an IRA, the designation fails to accomplish its intended purpose and those who are hurt are the people the IRA creator most wanted to help. If you have designated a trust as the beneficiary of your IRA, it pays to get it reviewed by a fresh set of expert eyes.


Second, take a close look to see if you have made any investments in your IRA that might be considered prohibited transactions. For example, let’s suppose you buy a piece of rental property in your IRA. Nothing wrong with that, unless you allow a disqualified person to use it even if they pay full market price for the use. In addition, disqualified persons cannot pay for any expenses associated with the property, earn a commission for buying or selling it, or perform maintenance on it. Disqualified persons include you, your spouse, parents, grandparents, children, grandchildren, or other lineal descendants, and certain fiduciaries (CPAs, attorneys, financial planners, etc.) or entities controlled or owned by disqualified persons.


Prohibited transactions are serious and can result in your IRA losing its tax-deferred status. In other words, if the IRS determines that you have engaged in prohibited transactions in your IRA, they will require you to pay taxes plus penalties on the entire value of your IRA.


If your IRA checkup uncovers an investment that could pose prohibited transaction problems, talk with your financial advisor to determine your best course of action. You may want to divest yourself of the asset. At a minimum, you will want to move all non-tainted assets to a new separate IRA.


Your financial advisor can help you with your IRA checkup. The main idea is to make sure your IRA is on solid ground in terms of compliance with IRS regulations and your desires for your beneficiaries.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., an independent wealth management firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to smerrell@montereypw.com.