1. Make it a New Year’s resolution to check IRA beneficiary forms and employer plan beneficiary forms. If you got married, had a birth/adoption or a death in the family in 2020, these forms may need to be updated. What better way to start the new year than with a new beneficiary on the retirement plan if a change is needed!
2. Don’t forget contingent beneficiaries. Often overlooked, contingent beneficiaries are critical. They generally inherit the retirement plan if the primary beneficiary predeceases the retirement account owner. You should have both a primary and contingent beneficiary named on your retirement accounts.
3. Don’t forget successor beneficiaries. As the population owning retirement accounts ages, inherited IRAs are becoming increasingly common. If you own an inherited IRA, make sure you name a beneficiary to it, also known as a successor beneficiary. This will ensure the assets go to the person you want them should you die less than 10 years after inheriting the IRA.
4. Review 2020 distribution reporting. Most IRS reporting will be done in January 2021 for 2020. Check all Forms 1099-R for accuracy. Mistakes are not uncommon. There still may be time to correct these forms if the mistakes are caught early enough.
5. Check year-end statements for accuracy. Be sure that all information is correct, including balance amounts. Also, make certain all checks issued at year end are received and deposited in the correct accounts.
6. Make a prior year IRA contribution for 2020. Just because the year has ended, there is still time to make that IRA contribution for 2020. Prior-year IRA contributions are allowed up until April 15, 2021.
7. Make an early IRA contribution for 2021. Contributing on the earliest date possible for a year, January 1, rather than on the last date possible – the due date for the year’s tax return, generates 15½ months of extra investment returns on the contribution for the year. That higher balance then compounds over all future years until funds are withdrawn from the IRA. Doing this every year multiplies the effect. Making contributions as early in the year as possible instead of at the last minute can significantly increase an IRA’s value by retirement.
8. Take advantage of catch up contributions if you are eligible. If you turn 50 in 2021, consider doing a catch-up contribution on your employer sponsored retirement plan, Traditional and Roth IRAs. If you turn 55 in 2021, you can contribute an additional $1,000 to your Health Savings account.
9. Avoid indirect rollovers of qualified account. When transferring your qualified investment account (i.e. 401(k) and IRA accounts), make sure to do a trustee to trustee transfer (also known as a direct rollover). This will avoid any tax consequences and you can do as many of these in one year as you need.
10. Don’t lose track of your cost basis when transferring a non-qualified or taxable account. Make sure your new custodian has your cost basis up to date. The original cost basis should transfer over to the new custodian upon completion of the transfer of the assets. This can save you money on unexpected capital gains tax when you make trades in the future.
11. Do a Form 5329 check-up. IRS Form 5329 is used to report the 10% penalty for early distributions, the 6% penalty for excess contributions, and the 50% penalty for RMDs not taken. In order to avoid penalties, make sure to review the rules. However, if any penalties are due to the IRS it is best to pay them as soon as possible. You should check to see that all Forms 5329 are filed. This is important because there is no statute of limitations if not filed.
12. Don’t get caught in a Medicare penalty by signing up late. If you are turning age 65 in 2021, remember to sign up for Medicare three months before your birthday.
13. If you are over the age of 72, make sure you take your required minimum distributions for all qualified retirement accounts by the end of the calendar year. IRA owners generally use the Uniform Lifetime Table to find the life expectancy factor to calculate their RMDs. There is a 50% penalty that applies when RMDs are missed, so be sure you don’t miss this deadline.
14. Verify that all 2021 RMDs for deceased IRA owners, if not taken by the IRA owner when alive, are paid out to the beneficiaries by year end. The year-of-death RMD is calculated as though the account owner lived for the entire year. It is often overlooked, particularly when IRA owners die near the end of the year without taking their full RMD. Beneficiaries who miss the deadline will face a 50% penalty on the shortfall.
15. Be sure to understand the new Inherited IRA Distribution Rules. Based on the new rules, beneficiaries of inherited IRAs are required to take all the RMDs by the end of the 10th year following the owner’s death. Careful planning can avoid a large distribution in later years 9-10. Keep in mind there are exceptions to this rule (a spouse or a beneficiary within 10 years of the decedent’s age). Make sure to consult with your financial advisor to discuss your specific situation.
16. Confirm that all 72(t) [substantially equal periodic payments (SEPPs)] distributions are made before year end. In order to avoid an early distribution penalty for taking money from a qualified retirement account before the age of 59 ½, you can take substantially equal payments over a 5-year period and avoid this. If you have started these payments to avoid the 10% early distribution penalty, the consequences are severe if payments are later missed or modified.
17. Make sure funds intended to be 2021 Roth IRA conversions leave the IRA account or employer plan by the end of the year. If your intention is to do a Roth IRA conversion, make sure the conversion is complete by 12/31/2021 in order to count for the 2021 tax year. You do not have up to April 15th to complete a prior year conversion; the funds must be distributed in 2021 and reported on a 2021 Form 1099-R.
18. Complete 2021 qualified charitable distributions (QCDs). QCDs allow IRA owners and beneficiaries who are age 70½ and older to transfer up to $100,000 of IRA funds tax-free to charity. These must be done by the end of 2021. If you miss the deadline, you will miss out on this tax break for the year.
19. Verify that employer plans are emptied if you are planning on using the net unrealized appreciation (NUA) strategy in 2021. If funds remain in the plan at the end of the year, the lump sum distribution requirement for NUA will not be met, and this valuable tax break may be lost.
20. Make sure to properly title your after-tax accounts. Ideally, you would register your account in the name of your trust to ensure that your assets transfer to your heirs based on your intentions upon your death. In the event you don’t have a trust, registering the account as a transfer on death will enable you to name a beneficiary on the account.
21. Be sure that separate accounts are set up by December 31, 2021 for any IRA beneficiaries who will inherit in 2021. When you inherit an IRA from someone who dies, the 10-year clock starts ticking on January 1 the year after death.