Want to avoid tax mistakes in your retirement accounts? Here's a checklist (2024)

As we head toward the end of 2018, people with individual retirement arrangements (IRAs) and 401(k)sshould create a checklist to help them avoid tax and inheritance mistakes over the restofthe year and beyond.

Most everyone knows they should check their contingent and secondary beneficiariesand take their required minimum distributions (RMDs)if they are 70½ or older or have an inherited IRA.

But what are other things retirement account owners should dobetween now and Dec. 31?

Timing matters

“The ability to proactively tax plan at the end of the year is perhaps the most overlooked opportunity missed by many tax payers,” says Joe Clark, a managing partner with Financial Enhancement Group. “Tax reporting is after the fact. Tax planning can move the needle.”

In his experience, Clark says nothing will separate you for your retirement money like the Internal Revenue Service. “Some things can changeand some things can’t, but from a tax perspective, nothing changes after Dec. 31,” he says. “Plan accordingly.”

Review your beneficiaries

Yes, you already know this and maybe even have done this already. But it’s still worth double-checking, says Andrew Whitaker, president of Gold Tree Financial.

“Many times, people checkand say, 'Yeah, that’s good'and go on when it isn’t good,” he says. “Tax-deferred retirement accounts may be the world’s best breeding ground for costly mistakes.”

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Careful with rollovers

“If a spouse diesleaving a spouse as beneficiary, no problem,”Whitaker says. “No probate, no tax at time of death so long as the spouse rolls the account into an IRA, keeps the account where it was, transfers the funds to their own existing IRAor opens a new IRA with the funds.”

However, he says, there is no provision in the IRS code for an IRA rollover to a nonspouse beneficiary.

“Children and other heirs can’t roll these funds into their own IRA,” he says. “What’s more, unless the parent did the right thing before they diedand the child does the right thing after the death, the child will lose a third of the funds to the government in a short period of time.”

What to do? Name specific beneficiaries on your retirement account; naming “to the estate” or “as per will” can be costly,Whitaker says.

Consider a qualified charitable distribution

For those 70½ and older who are charitably inclined, sending your charitable donations directly from your IRA to the qualified charity before Dec.31, 2018, keeps the distribution(s) off your tax return, says David Spence, a managing member with Palladium Wealth Management.

“This reduces your adjusted gross income, which is used in several formulae to punish tax payers, such as reducing medical deductions and total deductions for some, as well as potentially increasing your Medicare premiums.”

According to Spence, the qualified charitable distribution, orQCD, can be your entire RMD. Itcan also be a portion of itor an amount that is greater than the RMD. (The QCD amount counts toward your RMD for the year, up to an annual maximum of $100,000.)

Consider a Roth conversion

Given the cuts in individual tax rates in the Tax Cuts and Jobs Act of 2017, now would be a good time to convert your traditional IRA to a Roth IRA, at least partly.

“Many people will find themselves in a lower tax bracket,” says Brad Pistole, CEO of Trinity Insurance & Financial Services, noting that you have until Dec. 31, 2018, to convert any qualified account to a Roth IRA.

“If you find yourself in a lower tax bracket than previous years, you can talk to your CPA and find out how much wiggle room you have in your current tax bracket to convert to a Roth and pay a lower tax rate,” he says. “Taxes may never be this low again. There has never been a better time to convert to a Roth IRA.”

Of course, Spence says, you must pay tax now on the converted amount, but distributions from a Roth IRA are not taxed and are not subject to RMDs after the conversion.

Other Roth moves

The deadline to reverse a Roth IRA conversion from 2017 is Oct. 15, 2018. ““Any conversion to a Roth IRA in 2017 can be recharacterized back to an IRA if the investment has not performed well in 2018,” Pistole says.

Robert Powell is the editor of TheStreet’s Retirement Daily www.retirement.thestreet.com and contributes regularly to USA TODAY. Got questions about money? Email Bob at [email protected] views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.