The Estate Plan: IRA Rollovers

Understand new account requirements. Further, you'll want to check with the new account provider to see what they require in order to accept the rollover. In some cases, you may be required to open up an account first before submitting a rollover form. In other cases, the account creation and subsequent rollover may all be part of the same form or process. Either way, your client is counting on you to know what is required and how to get it done. Make sure you have all of the appropriate information from the previous provider first and then complete and submit the forms.

Check your work. These forms may require a lot of information, so you'll want to read them very carefully and make sure you fill them out correctly. If your client's rollover form from a previous carrier asks what type of distribution this is, you want to be sure to choose a Direct Rollover. This ensures that the funds are made payable to and go directly into their new IRA account with you. This often requires information such as how to make out the check or where to send the money.

Execute the rollover. Now, it's time to submit the forms, and most plans will require an original signature to initiate the rollover process. However, be sure to check with the plan administrator, as each has their own set of rules and every plan is structured in its own unique way. In many cases, your client will receive a check made payable to the new IRA custodian for the full amount of the rollover in the mail. It is then up to the client to get the check to you and make the deposit into the new account. Make sure the check is made out properly, and submit it for deposit with any required deposit forms.

Prepare for distribution. Now fast forward to the third financial phase, which occurs in retirement, the distribution phase. Once your client starts taking distributions from the IRA you established, you'll need to be aware of the most common distribution mistakes. The following tips apply when your clients reach age 70-and-a-half and you need to help them avoid a 50 percent tax on Required Minimum Distributions (RMDs) that are not taken by the Required Beginning Date (RBD).

The RBD is when your clients must start withdrawing from their IRA. This can initially be confusing because the rules for the first RMD will vary slightly in the first year compared to all future years once your client is over 70-and-a-half. The RBD is April 1st of the year following the year your client has turned 70-and-a-half. If your client turned 70-and-a-half in 2011, the RBD will be April 1st of 2012. Remember, if your client missed an RMD, the penalty is 50 percent of the required amount that was not taken.

"Once your client starts taking distributions from the IRA you established, you'll need to be aware of the most common distribution mistakes."

 Here's an example:

If John turns age 70-and-a-half in 2011, his RBD will be April 1st of 2012, and his first RMD must be taken by April 1, 2012. However, John's second RMD for tax year 2012 must be taken before the end of 2012 and must follow this schedule from now on. This results in two taxable withdrawals in one tax year, which can cause your client to pay higher taxes for that year. I recommend processing the first RMD withdrawal before the end of the year when the client turns 70-and-a-half to avoid this double RMD tax trap.

Be careful, as many advisors I've met with are unsure of these rules and believe that RMDs can be taken out by April 1 of the following year, every year, and not just the first year. I recommend setting up a systematic Required Minimum Distribution to avoid any confusion and potentially expensive tax penalty in future years.

With more than 76 million boomers transitioning into retirement, and the trillions of dollars invested in their 401(k)s that will need to be rolled over, you must be equipped with this information to help your clients make important rollover decisions. By following the steps outlined here, you will be able to help them avoid the potentially expensive tax traps that could happen during retirement.