How do You Know When to Make a Change?
I met with a sweet lady several weeks ago, who had been widowed for some time. Her husband had a successful career and took care of managing the couple’s finances. They did all the right things: saved diligently into retirement and non-retirement accounts, were modest spenders, raised a great family and had pensions from their loyal careers. When I asked her “What is the most important thing I can help you with?” She said, “taxes!”. Not in the preparation of her taxes, as she knew that work is specific to a tax preparer, but rather in the financial planning aspect of her taxable income. She added “I just can’t believe how much I pay in taxes! There has to be something that can be done!” To add salt to the tax wound, her taxable income was also increasing her Medicare premiums.
When we examined her sources of income, I saw a large distribution coming from the 401(k) that she’d inherited from her husband. We discussed her spending and as it turns out, she didn’t need to take the money out of this tax-deferred retirement account to pay her bills. So naturally, I asked her why she was taking this sizeable taxable distribution out of the 401(k), since she also was not of Required Minimum Distribution age. She said that the 401(k) company told her she had to take the distribution. Digging deeper into the reasoning, we’d concluded that although congress had updated the ages for Required Minimum Distributions with both the Secure Act and again with SECURE 2.0, the 401(k) did not update their plan documents. Therefore, by law, she was not required to take this distribution, but the plan was forcing her to.
All plan participants have four options when it comes to money in a previous employer’s 401(k) plan, and may elect any or a combination of these options. They may keep the money in the plan, they may cash out the plan and pay applicable taxes and penalties, they may rollover the assets to the retirement plan of a new employer if permitted, or they may do a direct rollover to an Individual Retirement Account (IRA).
The solution for her? Since it was not in her best interest to keep the money in the 401(k), we were able to do a direct rollover, which is a tax-free transaction, into an IRA. In the IRA, she will not have to take an RMD until she is 73. We aligned the investments with her investment objective of remaining conservative and will assist with the right amount for her RMD, at the right time. This leaves more money compounding in growth for longer, avoids the taxes triggered from the RMD when it is not necessary, and with lower income, will lower Medicare premiums. The time was right to make a change.
LouAnn Schulfer of Schulfer & Associates, LLC Wealth Management can be reached at (715) 343-9600 or louann.schulfer@lpl.com TheWealthInformationLady.com SchulferAndAssociates.com , or louann.biz
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
