Catch #1 – The Customer Service Phone Rep is Not a Substitute for a Good Financial Planner

During a recent information gathering call, the client, a 72 year-old widow and former school teacher, shared with me that she had a traditional IRA and a 403(b) tax sheltered annuity(TSA) . She said she was aware that she must now begin taking required minimum distributions, but when she called the insurance company that ran the 403(b) plan, a customer service rep advised her that she could elect to take the RMD amount due for the 403(b) from her IRA instead.

While it is true that the IRS permits IRA holders to take RMDs from one or any combinations of IRAs and 403(b) TSA holders to take RMDs from one our any combination of other TSAs, the TSA RMD CANNOT be taken from an IRA (and visa versa). Had I not picked up on this piece of misguided advice, the poor woman could have been subject to a 50% excise tax penalty for failing to take her 403(b) RMD!

Source: RMD Comparison Chart (IRAs vs. Defined Contribution Plans (IRS.Gov)

Catch #2 – Don’t Assume the HR Director or Company Execs Understand or Have Read the 401(k) Plan Summary Plan Description

A 65-year-old client who is still working, wanted to transfer a portion of his 401(k) plan, which was invested in a group annuity contract with relatively high internal investment expenses to an existing traditional IRA at Fidelity that would give him access to a broader range of investments and with lower investment costs.

The HR director of his company informed him that he could not withdraw money (except as a loan) from his 401(k) plan until he was officially retired or separated from service. However, when I reviewed the Summary Plan Description, I discovered that the plan explicitly permits in-service distributions for employees over age 60.

I truly LOVE finding gems like these… And when you share them with your client you look like a hero!

Contact Info: Laurey@fphawaii.com

The information contained herein is general in nature and should not be construed as providing specific tax or legal advice. All readers should consult with their tax and/or legal advisors for such guidance in advance of making investment or financial planning decisions with tax or legal implications.