Kevin Canterbury, through his work as a wealth management advisor, realizes that many clients have questions regarding their retirement accounts. Whether it be through an IRA or a 401(k), people want to be sure that their assets are protected and can properly facilitate their transition into retirement. Kevin recognizes that, despite the many similarities between IRA and 401(k) accounts, there are key differences that separate the two. Depending on certain factors, these differences may play a role in which type of account is preferable for your needs either prior or leading into retirement. Here, Kevin Canterbury of Arizona explores some key features of an IRA that are different than 401(k) accounts.

You Can Make a Qualified Charitable Distribution

One large difference between an IRA and a 401(k) is that IRA owners and IRA beneficiaries 70 ½ or older can send up to $100,000 from their IRA account to charity without needing to include any of the amount in their income through qualified charitable donations. You will not get a charitable deduction if you make a qualified charitable distribution; however, by never adding that income to your tax return, the results are often still lower in a tax bill than if you had taken a normal IRA distribution and made a regular charitable contribution. A QCD can also offset either a portion or all of your required minimum distribution. You would not be able to make a qualified QCD from any other employer-sponsored plan such as a 401(k) or 403(b), meaning that an IRA could be a stronger option if you plan to use retirement funds for charitable purposes.

You Can Avoid Withholding

Paying your taxes is a requirement, but it many do not know that it is possible to have a low tax bill after all of your exemptions, deductions, and credits are applied. It is also possible that you have withholding from other sources. In these instances, there is no need to have further amounts withheld from your retirement account districutions0- as it would essentially be giving the government a tax-free loan. Kevin Canterbury of Arizona notes that, with an IRA, you can avoid this because you can opt-out entirely of withholding. With a 401(k), distributions eligible for rollover are subject to a 20% mandatory withholding- with no option to opt-out.

You Can Take a Penalty-Free Distribution for Higher Education Expenses

Distributions that are taken from a retirement account before the person is 59 ½ are subject to both income tax and a 10% early distribution penalty. Kevin Canterbury of Arizona acknowledges that there are exceptions, however. For example, if you or certain family members need money from your IRA for higher education expenses such as tuition, books, supplies, etc., you can. For individuals that want to go back to school or have family that are looking to further their education, an IRA can allow them to take a distribution penalty-free. This is not the case with a 401(k), where you will be subjected to a major tax bill.

You Can Take a Distribution When You Want

If something happens that necessitates pulling from your 401(k) prior to retirement, you are at the mercy of both your plan’s rules and the Tax Code when attempting to access your money. If you are under the age of 59 ½, you may only have limited options for accessing- whereupon you may be able to take a loan from your 401(k) or take a hardship distribution. Kevin Canterbury acknowledges that this is not that case with an IRA, where you can usually take a distribution whenever you need it. It is important to remember that, despite their being no restrictions, you will still need to pay income tax and a penalty- but if you have no other choice, the option exists to access your funds.

Every year, over two million elderly people are subjected to elder fraud. Kevin Canterbury acknowledges that, in Arizona and other states with high elderly populations, elderly individuals can be extremely vulnerable to such fraud attempts. Reasonings for this include that elderly people are more likely to be trusting, may have decreased cognition, and often have retirement accounts, pensions, and money to spare. Kevin Canterbury realizes that the easiest way to prevent elder scams and the damages that they can cause to a family is to ensure that people have an idea of how these fraud attempts work. Here, Kevin Canterbury discusses some of the most common elder scams seen in Arizona.

Medicare and Social Security

In elder scam attempts that involve Medicare, the scammer poses as a Medicare representative to gain access to the individual’s personal information such as Medicare identification number or social security number. From there, the scammer can use the information to bill Medicare for fraudulent services and pocket the money from the transaction. Scammers may also use the opportunity to access bank account information directly and take money from the account. One of the easiest ways to thwart these scam attempts is by knowing certain pieces of information about Medicare and Social Security. For example, neither entity will ever call an individual attempting to sell them on a service. Also, neither entity will call you directly unless you have already contacted them first. When in doubt, always hang up and call the service directly.

Catfishing (Grandparenting and Sweetheart Scams)

In a catfishing scam, someone steals money from a person that they have “met” online while pretending to be someone else. Seniors often turn to online services and social media for connections and may lack the savviness to determine if these people are truly their friends or have ulterior motives. In a sweetheart scam, the scammer poses as a love interest to form a relationship with the victim. After some correspondence, these scammers will eventually ask for money. Grandparent scams are similar in that the scammer fakes a connection with an elderly person for money, instead by posing as a grandchild or younger relative. Catfishing scams are particularly dangerous because they can cost an elderly person thousands of dollars. Kevin Canterbury of Arizona acknowledges that, on top of that, it can be difficult to get the money back even if it is eventually determined that the person is fake. To prevent these scams, never send money to people online. It can also be helpful to vet your online relationship and know some of the common signs of fake online profiles.

Telemarketing and Phishing

In both telemarketing and phishing scams, scammers attempt to gain access to personal information that they can later use for financial gain. This includes information such as one’s address, name, birthdate, and accounting information. In telemarketing scams, calls are used to being the fraud, which can be identity theft, lottery scams, or credit card fraud. In some instances of elder fraud using telemarketing, scammers sell seniors goods or services that either never arrive or are obviously not worth what the person paid. Phishing scams are when the scam uses fake emails, calls, or texts to steal personal information. For example, a common phishing scam involves sending an elderly person an email that claims to be from a person’s bank or investment account saying that they need to update their information. In reality, this is a scheme to get the person to send the information needed to the scammer to initiate identity theft. Telemarketing and phishing scams notably increased in popularity during the pandemic, when many of us were called by agencies for vaccines and polling research. To thwart these attempts, Kevin Canterbury of Arizona recommends avoiding sharing personal information with individuals that are not verified professionals. If you are ever in doubt, hang up and call the organization directly.

You may need to transfer assets for all sorts of reasons. A working knowledge of various transfer techniques can help you determine when it’s appropriate to move money around, and how to minimize the tax and legal implications of the process.

Asset transfers are an important part of financial planning. As you move through life, you are constantly acquiring and disposing of assets until that final transfer takes place—the one you’re not around to see.

Some asset transfers are initiated as a result of a life event or other major decision. Others are suggested by attorneys or financial advisors as a way to better arrange your affairs. Some asset transfers are as easy as handing a tangible item over to another individual. Others are fraught with legalities and should not be attempted without counsel.

Here is an overview of asset transfers—the tip of the iceberg, if you will. Many of the regulations governing asset transfers are state laws, so your best bet is to check with your financial advisor and a good attorney— several of them, actually, in different specialties—who can guide you through the transfer process.

Why assets move

There are lots of reasons why people transfer assets. Here are some of them.

• Marriage or cohabitation. You want to put a new spouse or partner’s name on the title.

• Divorce. A couple wants to divide joint property between the two spouses and retitle it in separate names.

• Buyout (or sale to) co-owner. One of two co- owners wants to own full rights to the asset.

• Anticipation of incapacity or death. An elderly person wants to put a son or daughter on the title for ease of transfer.

• Establishment of a trust. There are many reasons for forming a trust; assets must be retitled in order to be transferred into the trust.

• Establishment of a private annuity. You need income and want to keep assets in the family; assets are sold to family members in exchange for regular payments.

• Reduction of estate taxes. You may want to remove assets from your estate in order to reduce the amount subject to estate tax.

• Reduction of income taxes. You may want to transfer assets to a low-bracket family member so investment earnings will be taxed at a lower rate.

• Medicaid eligibility. You may want to reduce the amount of “countable assets” so that Medicaid will pay for nursing home care.

• Bankruptcy. You may need to meet the state’s asset requirement laws in order to discharge debts or other obligations.

• Anticipation of lawsuits. You might need to protect assets from judgments (applicable to people in high-risk occupations, such as surgeons).

• Gifting. You may want to gift securities or other property to an individual or to charity.

• Cash or asset exchange. You may want to sell an asset for cash and/or buy a different asset.

Tax and legal considerations

It would seem that if an individual wants to get rid of an asset or if two individuals want to enter into a private transaction, they ought to be able to do it without tripping over a bunch of laws. For smaller transactions, they can. For instance, gift giving at birthdays and holidays would normally be exempt from asset-transfer laws.

In some transfer situations, however, there’s opportunity for tax evasion, taking advantage of people, or exploiting laws that are designed to help the needy. In those cases, certain procedures must be followed. And to make sure they are, the transfer process itself— the physical transfer of title to another person—may be extremely complex and not possible to complete without the help of an attorney, escrow officer, transfer agent, or other intermediary.

Even so, the intermediary arranging for the transfer may not be obligated to warn clients of the various tax and legal ramifications—in some cases he or she may simply be following instructions to transfer title—so it is up to you to know the law—or obtain legal counsel. Here are a few of the common considerations involved in asset transfers:

Gift tax

If you are thinking about transferring assets to family members to save income or estate taxes or to facilitate transfer later on, then you should be aware of gift tax rules. In 2020, any gift to an individual that exceeds $15,000 for the year ($30,000 for joint gifts by married couples) applies against the lifetime gift tax exclusion and requires the filing of Form 709 for the year in which the gift was made. The gift tax does not need to be paid at the time Form 709 is filed, unless the client has exceeded the lifetime gift tax exclusion of $11.6 million in 2020 (adjusted annually for inflation until 2025). Transfers to spouses who are U.S. citizens and to charitable organizations are exempt from gift tax. Payments made directly to an educational or health care institution are also exempt from gift tax. Property exchanged for equivalent value (as in a sale to another party) is not subject to gift tax. However, low-interest loans to family members may be subject to gift tax. Complicated transactions like these require the advice of an attorney or tax advisor.

Kiddie tax

The practice of transferring assets to children to avoid income tax on investment earnings is less popular since taxation grew more stringent, but it is still valid. Starting in 2018, investment income earned by qualified children is taxed at the same rate as trusts and estates. This will continue until 2025. It’s certainly possible to get around the kiddie tax by investing in assets that don’t pay current income—but then what’s the point of transferring assets to children, especially when parents must think about funding college.

Financial aid

The formula that determines need-based aid factors is a much higher percentage of assets when they belong to children (20%) as opposed to parents (5.64%). So the classic financial aid strategy is to keep assets away from children and stash parents’ assets in retirement plans, home equity, and other exempt assets. What if a child already has significant assets—say, in an UGMA or UTMA account? Is there any way to get them out of the child’s name? Probably not (check with an attorney to be sure), at least not until the child turns 18 or 21 and has the legal authority to transfer property. But by then it may be too late for financial aid, since schools look at the family’s financial picture as early as the student’s junior year of high school. Any parent who wants to maintain maximum financial aid flexibility (and this includes need-based scholarships, not just loans) should think twice before transferring assets to children.

Medicaid

Medicaid is designed for people with few assets who can’t afford to pay for custodial care. In the past, people had to “spend down” to such small amounts that often the healthy spouse was left nearly destitute. This led to rampant asset transfers and big business in “Medicaid planning.” However, the laws have been liberalized to better protect the healthy spouse, so asset-transfer gimmicks have waned somewhat. In any case, clients contemplating asset transfers in anticipation of applying for Medicaid need to be aware of “look back” laws—60 months for transfers to individuals (with some exceptions if the transfer is to a child under 21 or a child of any age who is blind or disabled) and trusts.

Bankruptcy

Each state has its own laws relating to how much property a client can keep and still discharge debts in bankruptcy. These laws also address property transfers in which it appears that the debtor is trying to pull a fast one.

Popular asset-transfer strategies

The main point to understand is that asset transfers may not be as straightforward as you think, and some transfers may have unintended consequences. At the same time, strategies you may not have considered could provide the perfect financial planning tools. Popular alternatives include:

• Annual gifting. Every year, give cash or property equal to that year’s gift tax exclusion to each child, grandchild, or any prospective heir to remove assets from the estate.

• Transferring assets to parents. If you are supporting elderly parents you may want to transfer assets to low-bracket parents who would pay taxes on the income being used for their support.

• Writing checks directly to educational institutions. Grandparents who are paying for their grandchildren’s education should pay the school directly; during the accumulation phase they should contribute to a 529 plan rather than an UGMA.

• Trusts and other advanced strategies. There’s no substitute for consulting with an estate planning attorney and tax advisor for individual advice regarding asset transfers that can accomplish specific objectives.