What are you waiting for?

The number of clients with 401ks and IRAs that are paying our RMDs but otherwise just languishing is both stunning and saddening.  There are only two reasons, after retirement age, why a person would rationally leave tax deferred savings in tax deferred investment vehicles.

Reason 1, They have lots of creditors.  In Texas, properly established, regularly funded, IRAs and 401K plans are exempt from the claims of creditors.  They are not lost in a bankruptcy, and the Constable cannot make you turn them over on an execution. So, if you have lots of debt, best not to cash in your 401K or IRA savings until after you get advice from a Bankruptcy Attorney.

Reason 2, They are afraid to lose their sense of security.  This is the product of years of advertising and marketing materials, conventional wisdom promoted by the financial services industry, that says that a large amount on deposit in a deferred tax account is equal to security.  Of course, this is both illusory and terrible tax planning once the holder of the account reaches 70 ½ years old.

Required Minimum Distributions exist both to increase government revenue by returning tax deferred savings to taxable income and to lull the account holder into a sense that they are satisfying their legal obligations and denying the government access to their funds if they simply leave the accounts intact.  The reality is that the money is going to be taxed at some point. The original theory was that the taxpayer in retirement would have a much lower tax rate than they did when they were working. For most people over 70 ½ they are at that point.

On the other hand, tax deferred accounts with RMDs are currently not countable against a resource limit for Medicaid purposes.  This means that proper prior planning is the key to success.

This article is written by an attorney at Attorney Donald Wyatt PC. Always consult an attorney before making any legal decisions. To make an appointment today, please click here to contact us.

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