Ed Slott, a respected author and expert on IRAs, offers suggestions for savvy IRA investing to Bankrate readers.
In your latest book, "Your Complete Retirement Planning Road Map," you start off by saying people are "daredevils" when it comes to their future. Why?
At a glance
Ed Slott, CPA
B.B.A., Adelphi University
- Author of three best-selling books including "Your Complete Retirement Planning Road Map," and "Parlay Your IRA Into a Family Fortune."
- Editor of Ed Slott's IRA Advisor, a monthly newsletter used by 4,000 financial planners throughout the country.
- Founder of Ed Slott's Elite IRA Advisor Group, a group of financial pros who remain continually updated on the most recent tax law changes, legal cases, IRS rulings and planning strategies that can affect their clients through Slott's Web site, www.irahelp.com.
- A recipient of Excellence in Estate Planning and Outstanding Service awards from the Foundation for Accounting Education.
- Has lectured for more than 15 years about strategies to protect retirement plans from "needless and excessive taxation."
People are daredevils, but not on purpose. They're generally unaware of what precautions they need to take and what planning options are available to help them keep more of their retirement funds and pass more of that money on to their heirs. As a result, they don't plan. Most advisers -- over 99 percent -- do not possess the required knowledge to help their clients through the maze of tax rules that must be navigated in order to keep their clients' money from going right back to the government or to take advantage of the key tax provisions that will allow retirement funds to keep growing tax-deferred for decades or longer.
So people accumulate, hoping everything will be all right, but then don't think about how they're going to get that money later on. They give up huge chunks of their retirement savings to the government when they take the money out. Combined tax on retirement accounts can be as much as 70 percent between estate tax, income tax and your state version tax of those taxes, plus distribution mistakes. They don't realize it until someone dies and mistakes are exposed. But the way you withdraw assets directly affects how much you keep and how much the government gets. Most people don't take advantage of breaks that can really cut down taxes.
What are some of the biggest tax breaks people are missing when they withdraw retirement funds?
One is a net unrealized appreciation, which is a tax break for company stock in a plan. It allows you to withdraw highly appreciated company stock tax-free as part of lump-sum distribution. If your company, your adviser or your financial institution does not know about this big tax break, then you need to find an adviser that does. Again, you can find a specially trained financial adviser on our Web site at www.irahelp.com.
Ten-year averaging is another break for company employees who were born before 1936 or for their beneficiaries. This is a tax break that only applies to qualifying lump-sum distributions from plans and not to distributions from IRAs. In some cases it allows you to pay a lower tax on a lump-sum distribution from a plan.
The "stretch IRA" for beneficiaries allows beneficiaries to extend distributions over their lifetime, helping them build their inheritances tax-deferred instead of paying tax on retirement funds right now. Paying tax now means you'll have less later. Deferring tax means you'll build more money for later.
Because they are not working with the right advisers, consumers are paying the price. They don't focus on the distribution phase. The result is that most consumers are being underserved by their current advisers, but they don't know it until it is too late and the damage is done and there's unnecessary loss of retirement funds due to excessive taxation. The bigger problem is that their adviser does not know it, either. This is a recipe for retirement disaster and that is why I created Ed Slott's Elite IRA Advisor Group. It's a highly specialized adviser who does proactive planning. I realized this when I was lecturing planners across the country.