A Conversation with Cannon Retirement Account Expert Larry Divers
Professing shock and dismay at this escape, Chief Buttonwood of the SEC Retirement Security Police, urged the public to chill. “We will quickly round up these miscreant acronyms. I’m pleased to report we have already taken the frozen Keogh into custody, although he couldn’t walk very fast, I’ll admit.”
Part of the difficulty in dealing with this issue, the Chief explained, is that many people have no idea what these acronyms mean and might approach one in a friendly way only to be zapped by the IRS. “Let’s face it, when it comes to annual income limits when making a deductible or non-deductible contribution to an IRA, who really knows the difference between MAGI (modified adjusted gross income) and AGI (adjusted gross income) especially if MFJ (married filing jointly)?”
To protect the retirement savings of Americans, the Chief announced he had appointed Larry Divers, Cannon Executive Vice President and Retirement Services Expert, as temporary Senior Investigative Agent. His mandate? Capture these acronyms and return them safely to the joint custody of the IRS and the Employee Benefits Security Administration.
Good move. I’ve known Larry for years and he can talk for hours about the arcania of retirement plans—even when you don’t want him to. He makes his way through the scrum of reporters shouting for his attention and comes over to me. “Larry, what is your greatest fear at this moment?”
He mops his brow with a handkerchief. “People combining pre-tax and post –tax contributions into the same IRA rollover. These acronyms may look innocent but they can cause unsuspecting investors a terrible headache.”
Larry pauses to take several aspirin then continues, “investors need to understand that their contributions to a QRP such as a 401(k), or other QRP-type plans such as 403(b) and 457 plans are pre-tax. Additionally, beginning at age 70 ½ you must begin to take your RMD based on your life expectancy which you compute using the Single Life Table, or, if married, the Joint and Last Survivor Table as published in Treasury regulations, Section 1.401(a)(9).”
“Sounds great, Larry. Thank you. But what do you mean?”
“In plain English, if you’re in a QRP, or a qualified retirement plan, or a similar type plan, once you turn 70 ½ you must annually begin to take a sum of money known as the Required Minimum Distribution. If you do not take your RMD you will pay a 50% excise tax plus income tax on the amount you should have withdrawn but didn’t. Example, if you are in a 30% tax bracket and should have taken a distribution of $10,000 and didn’t do it, the penalty is $8,000. Yes, that’s right, the IRS takes 80%.”
The amount you take annually is based on your life expectancy using tables published by the IRS. “From the time you take your first distribution to the last, you must include that amount in your gross income for the year in which you take it and pay ordinary income tax,” Larry says.
“Ouch! So even if you don’t need it, you’ve got to start taking it? Is there an exception? I live in Washington, DC and I have noticed that every rule has an exception.”
Larry lights up a cigarette.
“I thought you quit?” I ask him.
“I’m so stressed out, this is an exception,” Larry says, “like the QLAC. Heard of that?”
“Maybe during duck hunting season.”
Larry shakes his head. “QLAC is pronounced ‘queue—lack’ not ‘qualack’.”
“Sorry. Go ahead.”
“QLAC is a Qualified Longevity Annuity Contract.”
I nod ‘yes’ even though I haven’t the slightest idea what he is talking about.
“It works this way. Just prior to turning 70 ½, you can take the lesser of $125,000 or 25% of the total funds in your qualified plan, and purchase a deferred income annuity. By doing this, you are able to exclude that sum of money from the Required Minimum Distribution until you reach age 85 when you must begin to withdraw that money according to the standard RMD calculation. You can also make a onetime tax-exempt transfer from a QRP to an HSA (Health Savings Account) based on certain conditions.”
To summarize: putting money into a retirement account is far easier than taking it out.
To learn more about this topic, register for our Retirement Plan Services I course.
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COMMENT FROM CHARLES McCAIN: Cannon Financial Institute is the “gold standard” for wealth management training, development and consulting. I worked at the firm for many years and my colleagues were the most talented people I have ever worked with. Last year the firm sought me out to write articles for them which I started doing in January of 2016. After a hiatus of nine years, I am pleased to report that my colleagues continue to be the most talented people I have ever worked with and it is a pleasure to be working with them again. I take them directly from the Cannon website and the links work. I will posting the articles I write for them on my blog after they appear on Cannon’s website. https://www.cannonfinancial.com