Year-end review of your retirement accounts – Part 2

Year-end review of your retirement accounts – Part 2

December 03, 2021

I am often surprised by how little attention some people give to their retirement accounts. They don’t look at statements. They don’t remember who their beneficiaries are. Sometimes they can’t even tell me if their company pays a match on their 401(k) plan. I know how busy life can get, but a “set it and forget it” approach to retirement savings is rarely a recipe for success.

If this sounds like you, I want to encourage you to work with an advisor who will help you keep your retirement accounts working for you. According to a Vanguard whitepaper, expert advice can boost your returns by 3 percent. A separate study conducted by Russell Investments reached a similar conclusion. Whether you work with an advisor or not, you will benefit by doing a year-end review of your retirement accounts. In last week’s column I suggested three questions you might want to ask as part of that review. Here are three more.

Q: Are your beneficiary designations up to date?

A: Life happens and sometimes your IRA beneficiary designations can get out of date without you even realizing it. Has there been a divorce or a death in the family? Have you had a baby? Any of these could mean you need to update your beneficiary designation. 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 may have been more to the story than she told me, but the lesson was clear: it pays to regularly review the beneficiary designation on each of your retirement accounts.

Q: Should I name my trust as my IRA beneficiary?

A: Naming your revocable trust as the designated beneficiary for an IRA is tricky. Jeffrey Levine, a nationally-recognized IRA expert, once told me that 85 to 90% of the time when he sees a trust designated as the beneficiary of an IRA, the designation fails to accomplish its intended purpose. Unfortunately, those who end up getting 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.

Q: Have you made any investments in your IRA that might have given rise to a prohibited transaction?

A: This is an especially tricky area for people with self-directed IRAs. Certain transactions that seem innocuous on the surface, can actually have grave consequences in an IRA. For example, let’s suppose you buy a piece of rental property in a self-directed IRA. If you do any work on the property or allow a family member to do any work on it, you have engaged in a prohibited transaction. If you allow your brother to live in it—even if he pays full market price—you have engaged in a prohibited transaction.

While we can’t go into all the details about prohibited transactions in today’s column, you need to be alert to the potential problem. 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 review uncovers potential 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.

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