All Advisers Are Well-Versed On Distributions From Retirement Plans

Yes this is a myth.  And here's a case in point from IRA guru Ed Slott's recent article in Financial Planning magazine.  The Greens were awarded $50,000 by the arbitrator!

PRACTICE

FINRA Award Goes to Client After Advisor’s Tax Oversight

By Ed Slott
April 11, 2016

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Subpar tax advice from advisors can lead to big rewards for clients — but not the kind of rewards you want them to reap.

In a recent FINRA case, an elderly woman and her daughter were awarded more than $50,000 for what an arbitrator deemed insufficient advice regarding the tax consequences of an IRA distribution. 

The payment was awarded even though the claimants had only suffered an increase in taxes of about $9,000 as a result of the total distribution of a roughly $30,000 IRA CD, and despite the fact that no investment had been purchased from the advisor in question.

How did this happen?

Marilyn Green, the elderly woman in question, owned a CD in an IRA that was held with Bank United. As Marilyn was already in her 80s and suffering from dementia and depression, her financial affairs were largely tended to by her daughter, Melissa Green, who had been granted power of attorney.

Sometime close to the CD’s maturity date, Melissa Green discussed her mother’s CD with Samuel Izaguirre, a Fort Lauderdale-based registered representative of LPL Financial. LPL and Izaguirre had entered into an agreement with Bank United to provide investment advice and brokerage services to its clientele.

THE RECOMMENDATION

During Melissa’s conversation with Izaguirre, he recommended that Melissa withdraw the approximately $30,000 held in the maturing IRA CD and place the funds in a personal checking account. He did not provide any information with respect to the potential tax consequences of such a transaction.

Following Izaguirre’s advice, in August of 2014 Melissa closed the IRA CD and transferred the funds to her mother’s personal checking account.

The following year, when Melissa visited her mother’s tax preparer to complete her 2014 return, she learned that the $30,000 IRA distribution resulted in roughly $9,000 of additional income taxes. Melissa was not happy, and the Greens filed a complaint that ultimately made its way to a FINRA arbitrator.

Your Constructive Comments are Welcome!

I CAN'T AFFORD TO SAVE ANY MONEY THIS YEAR

The heading of this post is, as usual, a myth.  You can save money this year.  Thanks to WealthManagement.com for some of these tips:

1. I think all parents of college-bound kids are aware of the FAFSA.  There is no charge for this application for student aid.  And the early bird gets the worm; funds are limited.
2. Start or increase your 401(k) contributions, especially if you're not taking full advantage of  company matching.
3. Consider Traditional or Roth IRA contributions, especially for non-working spouses and your kids.  If your kids have earned income, the full amount (up to $5500) can be shunted into a Roth IRA.  IRA planning is complex and the best strategies depend on a careful analysis of your retirement expectations.
4. Max out Health Savings Account contributions ($3350 for singles, $6650 for couples and families).  As with IRAs if you're over age 50 you can kick in an extra $1000/yr.  This money can be triple tax free!:  Contributions are deductible, earnings are tax-deferred, and withdrawals are tax-free if used for legitimate medical expenses (see IRS pub. 969).
5. If you did a Roth conversion at the peak of the market in 2015, you have until 10/15/2016 to re-do it.  If your Roth is worth less than when you converted, you un-convert or "recharacterize" it, and then reconvert at the lower value thereby reducing your tax bill accordingly.
6. Have a neutral, unbiased, fiduciary adviser (like me) analyze the fees and expenses in your portfolio.  This is especially important in the later years when you should be conservatively allocated because taxes and fees from excessive turnover can consume your earnings. 

Your Constructive Comments are Welcome!