Inheriting a 401(k) Plan

Within the scope of an investment portfolio, the commonplace 401(k) may seem to be a simplistic account. But it’s not, especially when it comes to estate and legacy planning. The named beneficiary on the plan will inherit your 401(k) regardless of your will’s instructions. And from there, a spectrum of various choices emerge based on a plethora of different variables.

First off, you can’t name anyone other than your spouse as the beneficiary unless you get your spouse to sign off on a form that says it’s OK. This rule is designed to protect a spouse from a partner who is considering a divorce and tries to put all of his or her financial accounts under his or her own name before announcing this intention.¹

If you inherit a 401(k) from your spouse, what you decide to do with it and the subsequent tax impacts may depend largely on your age and whether or not your spouse had started taking required minimum distributions (RMDs) before he or she died. In general, you may (1) choose to leave the money in the plan and take distributions; (2) transfer the funds to an inherited IRA; or (3) transfer the money to your own IRA.²

If you are a non-spouse beneficiary of a 401(k) plan, the rules have changed recently. In late 2019, Congress passed legislation that limited a strategy called the “stretch IRA.” This strategy was particularly popular among people who had saved a substantial amount of money in their retirement accounts. It used to be that this type of beneficiary could potentially take distributions from the account throughout decades, based on the beneficiary’s age and life expectancy.³ This meant that those assets could continue growing tax-deferred indefinitely.

Now, as a result of the SECURE Act, most new non-spouse beneficiaries must fully distribute all the account’s inherited assets in 10 years or fewer after the death of the original account holder. If an account owner had previously set up a trust to be beneficiary of a qualified account prior to the SECURE Act, the new rules could lead to undesirable results. If you have such a trust as the account beneficiary, it’s important to have it reassessed to make sure the language doesn’t negatively impact the trust’s beneficiaries or create a tax disadvantage.⁴

There are more factors related to inheriting a 401(k) plan than just the recent SECURE Act provisions, including whether or not the account owner had reached the required date to start taking RMDs before death. The exact date depends on whether the account owner was still working at the company, had retired before age 70 ½ or was working at a different company.⁵

Suffice it to say that many things related to an inherited 401(k) are complex. And, while there are effective strategies, they can be complex, too. For example, you could decide to take advantage of spousal beneficiary strategies instead of naming a non-spouse. This might include the surviving spouse gifting the residual RMDs to other heirs or contributing that income to a taxable account and naming those heirs as beneficiaries upon her death, which may offer a strategic tax advantage.⁶

In short, estate and legacy planning is complicated business — even for something that seems straightforward, like a 401(k) plan. We can work with your estate planning and tax professionals to help you address these issues. 

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies

1 Rebecca Lake. SmartAsset. Oct. 22, 2019. “A Guide to Inheriting a 401(k).” https://smartasset.com/retirement/inherited-401k. Accessed Feb. 24, 2020.

2 Ibid.

3 Greg Iacurci. CNBC. Dec. 17, 2019. “Lawmakers are killing this popular retirement tax break for the wealthy.” https://www.cnbc.com/2019/12/17/lawmakers-may-kill-this-popular-retirement-tax-break-for-the-wealthy.html. Accessed Feb. 24, 2020.

4 Alessandra Malito. MarketWatch. Jan. 9, 2020. “Inheriting a parent’s IRA or 401(k)? Here’s how the Secure Act could create a disaster.” https://www.marketwatch.com/story/inheriting-a-parents-ira-or-401k-heres-how-the-secure-act-could-create-a-disaster-2019-12-26. Accessed Feb. 24, 2020.

5 Rachel L. Sheedy. Kiplinger. May 30, 2019. “Inherited 401(k)s: 6 Questions Heirs Need to Ask.” https://www.kiplinger.com/slideshow/retirement/T001-S004-inherited-401k-6-questions-heirs-need-to-ask/index.html. Accessed Feb. 24, 2020.

6 Rhian Horgan. Nasdaq. Jan. 30, 2020. “2 IRA Changes to Consider Right Now, Thanks to the SECURE Act.” https://www.nasdaq.com/articles/2-ira-changes-to-consider-right-now-thanks-to-the-secure-act-2020-01-30. Accessed Feb. 24, 2020.

The Coronavirus & Other Oddball Risks to Retirement

One of the reasons investing never gets boring is because it is an ever-changing, never-sleeping industry that presents new opportunities — and new risks — every day.

One of the most recent threats to the global business economy, and therefore investors, is the coronavirus and its far-reaching impact. China, home to much of the world’s manufacturing, has been hard hit by the epidemic. In its wake, travel has been one of the first casualties. This is bad news not just for tourists, but for the thousands of business representatives who fly in and out of the country each day. The virus outbreak among Chinese workers threatens business trade and supply chain production for markets throughout the world.1

The outbreak of coronavirus is but one example of the types of unexpected risks that can disrupt a wide variety of industries — and one example of why financial advisors recommend diversification. While all investments involve risks, there are additional risks associated with foreign investing, such as currency fluctuations, economic instability and political developments. Building an investment portfolio that includes uncorrelated asset classes can help defend against the wide range of both anticipated and unanticipated risks that investors face. We’re happy to review your portfolio to assess how much market risk you might be exposed to; just give us a call.

If you don’t think the coronavirus has impacted U.S. companies, think again. McDonald’s, Starbucks and H&M have all had to shutter stores in China. Disney closed its Shanghai and Hong Kong theme parks. The Marriott, Hyatt and Hilton hotel companies have suspended some operations in areas most affected by the virus. Carnival and Royal Caribbean Cruises have been forced to cancel scheduled voyages to help curb the spread from one country to another.2

The problem isn’t isolated to retail stores, either. Technology companies like Apple and Google have restricted employee travel either completely or only for “business-critical situations.” Additionally, General Motors, Honda and Nissan have suspended auto production.3

According to Wilbur Ross, the U.S. Secretary of Commerce, there is perhaps a silver lining to the crisis. In a recent interview, he intimated that if U.S. manufacturers returned many of their offshore operations to America, they could better control such risks.4

However, risk is risk — and it takes on many different guises, even domestically. Some investment analysts warn that political campaigns heading toward the November elections may be a primary source of market volatility throughout the year. The two major political parties appear as divided as ever with policies that offer both positive and negative components. Regardless of party affiliation, both offer platforms that seem likely to increase spending and expand our nation’s debt.

This dynamic is likely to stretch U.S. Treasury valuations even further, while the relationship between the Federal Reserve and the investment markets may continue to be strained. While the Fed altered monetary policy in 2019 to accommodate markets, there could be less wiggle room now to combat any further risks to the economy such as rising asset price inflation.5

And then there’s the problem of trade wars promulgated by aggressive 140-character tweets — an approach that tends to pain Republicans and Democrats alike, not to mention Wall Street.6

1 Franklin Templeton. Jan. 24, 2020. “Monitoring China’s Outbreak and Other Potential Market Shocks.” https://www.franklintempleton.ca/en-ca/investor/article?contentPath=html/ftthinks/common/blogs/monitoring-chinas-outbreak-and-other-potential-market-shocks.html. Accessed Feb. 5, 2020.

2 Sergei Klebnikov. Forbes. Jan. 28, 2020. “Coronavirus Hits Big Business: These Companies Are Cutting Operations And Restricting Travel To China As Disease Spreads. https://www.forbes.com/sites/sergeiklebnikov/2020/01/28/coronavirus-hits-big-business-these-companies-are-cutting-operations-and-restricting-travel-to-china-as-disease-spreads/#509d69381264. Accessed Feb. 5, 2020.

3 Megan Cerullo. CBS News. Jan. 30, 2020. “China coronavirus causing chaos for U.S. companies.” https://www.cbsnews.com/news/coronavirus-brings-business-operations-in-china-to-standstill/. Accessed Feb. 5, 2020.

4 BBC News. Jan. 31, 2020. “Wilbur Ross says Coronavirus could boost US jobs.” https://www.bbc.com/news/business-51276323. Accessed Feb. 5, 2020.

5 Sonal Desai. Franklin Templeton. Jan. 14, 2020. “On My Mind: Will the US Survive the Politics in 2020?” https://www.franklintempletonnordic.com/investor/article?contentPath=html/ftthinks/common/cio-views/on-my-mind-will-the-us-economy-survive-the-politics-in-2020.html. Accessed Feb. 5, 2020.

6 Ibid.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser firm. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies

Boomerangers: When the Chickadees Return Home to Roost

That first summer after they graduate from college. When they get laid off. After a divorce. There are plenty of times in life when adult children, albeit reluctantly, move back in with their parents until they can get on stronger financial footing.

Unfortunately, this has a way of happening right about the time when parents may no longer have such financial obligations as college bills and auto loans, and maybe even have paid off the mortgage. It’s the time when they may be in higher earning years and can finally start socking away a larger portion of their income for retirement to help make up for any lost ground.

Then suddenly, the food and utility bills are higher, and they’re also paying for these “boomerang” children’s health and auto insurance, student loans and maybe even their cell phone bill. It can be difficult to teach financial responsibility to adult children when they may be at their lowest point.

If this is your situation, you can’t let your adult children negatively affect you, financially. It’s important that you preserve your assets and keep up with your savings goals. If we can help you figure out ways to adjust your budget to accommodate boomerang kids or explore insurance options for helping you meet your retirement income goals, please give us a call.

A recent Bankrate survey found that half of parents are sacrificing their financial goals to help out adult children — and that’s not exclusive to the ones who move back home. This alarming trend also prevents many near-retirees from downsizing to achieve savings in housing-related costs, including big-ticket expenses like property taxes, homeowners insurance and ongoing maintenance costs.1

Some of the more common suggestions for managing boomerang kids are to set deadlines for how long they can stay; put benchmarks in place for when you expect them to start paying their expenses, including rent; help with their transition to adulthood if necessary; and, if you can’t, let your financial professional be the “bad guy.”2

Today, about one-third of the millennial generation lives at home with their parents, with an average stay of three years. If you think that indicates a lazy generation, you might want to think twice before judging too harshly. While the last recession posed a difficult time for baby boomers and Generation X, it was hardest on millennials, many of whom were just starting out in adulthood. The economic setback set them back as well. As a result, the net worth of today’s young adult is half what it was for baby boomers at that age, and wages are 20% less on an inflation-adjusted basis.3

As for homeownership, widely considered the most common means of growing wealth, millennials clearly lag there as well. The rising cost of residential real estate, the shortage of available homes on the market and large amounts of student debt have proved to be a real game-changer for young homebuyers. In fact, the median age of first-time homebuyers in 2019 was 33, up from 29 in 1981, and the median age for second-time homebuyers is even more surprising: 55, up from age 36 in 1981.4

If you want to help your adult child but want him to have more independence, consider opportunities to give him a place to live that may also benefit you in retirement. You can do this by buying a small rental unit or even building a tiny home on your property, assuming you have the room. Many states are setting up ordinances for what they term “auxiliary or accessory residential units (ADUs).” These are smaller homes on your property that can serve as a guesthouse, in-law apartment, residence for a caregiver — or temporary housing for your boomeranger.5 

1 Ron Carson. Forbes. Aug. 11, 2019. “Five Ways To Keep Boomerang Kids From Ruining Your Retirement.” https://www.forbes.com/sites/rcarson/2019/08/11/five-ways-to-keep-boomerang-kids-from-ruining-your-retirement/#29a78f276349. Accessed Jan. 15, 2020.

2 Rodney Brooks. U.S. News & World Report. May 24, 2019. “Don’t Let Boomerang Kids Endanger Your Retirement.” https://money.usnews.com/money/retirement/baby-boomers/articles/dont-let-boomerang-kids-endanger-your-retirement. Accessed Jan. 15, 2020.

3 Amica. 2019. “When Adult Children Move Back Home” https://www.amicalifelessons.com/infographic/when-adult-children-move-back-home/. Accessed Jan. 15, 2020.

4 Jessica Lautz. National Association of Realtors. Jan. 13, 2020. “Age of Buyers is Skyrocketing…But Not for Who You Might Think.” https://www.nar.realtor/blogs/economists-outlook/age-of-buyers-is-skyrocketing-but-not-for-who-you-might-think. Accessed Jan. 15, 2020.

5 Erik J. Martin. Dallas Morning News. Dec. 28, 2019. “Adding an auxiliary dwelling unit on your property may be worth it.” https://www.dallasnews.com/sponsored/real-estate/2019/12/28/adding-an-auxiliary-dwelling-unit-on-your-property-may-be-worth-it/. Accessed Jan. 15, 2020.

We are an independent firm helping individuals create retirement strategies using a variety of insurance products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic retirement income strategies and should not be construed as financial advice.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.