“Big Joe” Clark Column: Neglected Assets Can Create Tax Headaches | Columns
King Solomon wrote: “It is the little foxes that spoil the vine. In a secular moment, he could have written: “It is the small assets that spoil the estate plan.
We uncover overlooked assets in a family’s financial picture most often with careful scrutiny. They may be ignored or held in accounts you no longer consult; however, these overlooked assets require your attention.
It could be a small 401k from a first job, an old IRA contribution, or some lingering stock in a long-forgotten safe. Although we are focusing our attention on larger assets and the current environment is easy, investments are not meant to operate on autopilot. Tax requirements and investment opportunities dictate at least occasional attention.
When reviewing your assets, some basic rules apply. Typically, a family will have a joint account and a few IRAs or retirement accounts. Remember that retirement and IRA accounts must remain in individual names, and account holders cannot mix their money with their spouse’s accounts.
If you have three or four small IRA accounts in your name, you can put them into one account to simplify and generally reduce administrative expenses. If you have old retirement accounts, you may be able to transfer them to your current retirement plan or directly to your IRA.
Orphan accounts and long-lost dollars can impact decisions in one of five distinct financial areas. These areas are not important and it is not easy to understand how they are related.
Where to start ? Always start with the end in mind. For most people, the starting point is their retirement plan. We call it your life after work because most people don’t take vacations for the rest of their lives after leaving the workforce. Instead, they move on to a new phase.
Tax planning should be done proactively before the end of each year to properly determine contributions and financial decisions. Creating and following your investment policy is paramount to weather the storms and challenges of market movements.
There are also occasional situations that accompany life. Some are good and some are painful, but they are part of the process. Last but not least is the inheritance plan which ensures that your assets are distributed where and how you want after you leave. Allowing orphan assets to exist without recognition can create challenges in each of the five critical financial elements.
When we discover investment decisions that create tax penalties, the situation occurs because another account has been completely ignored more often than not. When estate plans fail, it’s because the accounts weren’t titled correctly, so the documents couldn’t work as intended. When insurance policies do not perform as intended, beneficiary designations are ignored. Every seemingly minor scenario can create huge holes in your financial future.
It is essential to understand the reciprocal relationship between investments and taxes. It’s equally important to keep track of what you own.