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Kelly Ruggles is the author of "The Financial Playbook" for Retirement.
Kelly C. Ruggles, Financial Planner and Educator

Chapter 2- Retirement Plans & IRAs

Your RetirementPeople are generally living longer than their parents and grandparents due to advances in medicine and nutrition. In fact, today the average person lives seven years longer than their oldest parent. This is, of course, welcome news but as you retire you need to have a plan to make your income last much longer than in years past.

As of 2005, the average life expectancy in the US is 77.6 years. This of course includes statistics of infant mortality. If you have lived to 65, you are most likely to make it to 85 or so.

This means that you should plan for at least 20 years of income or more as you retire. Furthermore, it is rare to meet a competent planner who does not plan to age 100 for his clients.

There are numerous ways to plan for your retirement. Keep in mind the common goal is to save and invest in the most tax-advantageous way possible, and then to use that nest egg in your retirement years leaving what is left to your children and grandchildren. The obvious key is sound financial planning. 


Individual Retirement Accounts (IRAs) are popular tools for retirement planning, but they are far more complex than most investors realize. An IRA is an investment that gives you the opportunity for tax-deferred earnings and growth. You can contribute to an IRA if you are under the age of 70½ the year the contribution is being made. Beginning in 2005 you can contribute $4,000 or 100% of your earned income, whichever is less, to your IRA each year. 

Beginning in the year that you turn 70 ½, you must start taking distributions from your IRA.  IRA holders who don’t take their required distributions are subject to a heavy penalty.

What goes in an IRA 

There are many myths and misunderstandings about what should be in your IRA. Some people think that an IRA is just one big all-encompassing tax shelter but it’s not that simple.

Today, most dollars in IRAs come from rollovers of company or government sponsored retirement plans such as 401(K) s, 403(B) s, deferred compensation plans and the like. It is the author’s opinion that at retirement your best option is to roll your sponsored plan into an IRA for the following reasons:

·            Your investment options are limited to only what is available in the sponsored plan

·            Changing investment options is often slow and inflexible

·            In worst case scenarios, the company could fail which at best, would leave your account frozen

·            Sponsored plans do not have the option of allowing for Multi-Generational, or inherited IRA options

IRA distributions

Many people spend a great deal of time planning how much to contribute to their IRA but neglect to plan for distributions.


By law a spouse is the beneficiary of your IRA. In effect at the death of one spouse the surviving spouse owns the IRA. This is referred to as a spousal IRA. This transfer is not a taxable event. The surviving spouse is required to take minimum distributions at age 70½.

A common IRA mistake 

A colossal IRA mistake is designating the wrong beneficiary(s) after you and your spouse are deceased or if you are not married. An example would be to name your estate as beneficiary of your IRA. If you do so your IRA is fully taxable when you pass away. 

If you properly name children as your final beneficiary(s) or contingent beneficiary(s), they can defer full distributions and taxes for years. This allows your surviving children to make financial decisions in their own best interest. They can make a full withdrawal from the IRA at your death if they choose or take minimum distributions over their lifetime as needed. The only additional rule for children beneficiaries is they must take at least minimum distributions based on their age. The younger one is the smaller the required distribution. Assuming a decent rate of return their account should actually grow through their lifetime. Many IRA beneficiaries with good planning should actually be in a position to pass this money on to – you guessed it – your grandchildren. Many planners believe this process will actually pass more money form one generation to the next than any other vehicle available today. Please note that this required minimum distributions are not penalized for those under 59½ in this circumstance.


         For the above IRA transfer to your children to be successful, the beneficiary forms must be completed correctly. Many financial planners, CPAs, Attorneys and certainly brokers do not have the knowledge to do this correctly. Consult a planner with experience in this process or your IRA could be fully taxable at your death.

Distributions after age 70

At 70½ distributions from your IRA are required. If invested well, your IRA should continue to grow throughout your lifetime even as you take distributions. This could result in the double taxation at your death. It is often possible for your IRA to be fully subject to income tax and estate tax at your death.

This is generally true for larger estates of $1.5 million or more, but either way you should consult with your advisor about how your IRA is being distributed so as to avoid any unnecessary tax event.

Rolling over your IRA from an ERISA Plan

Almost all 401(k) s and other forms of ERISA plans such as 403(b) and deferred comp plans must be liquidated and all taxes paid within five years of the death of the last spouse (Some plans are even more restrictive). An IRA can be inherited by surviving children, used for their own retirement and in almost every scenario is a better choice.

Distribution of employer stock

If you take distributions of your employer stock, you will pay ordinary income tax on the original cost of the stock, while also obtaining capital gains treatment on the appreciation when you sell the stock. This is a complicated process and you should consult a skilled professional if you have company stock in your work- sponsored retirement plan.

A Special Word about Roth IRAs

One of the most frequently asked questions of any financial advisor or planner runs along the lines of, “I’ve changed jobs, so should I convert the 401k I had at my old company to a Roth IRA?” Another question is, “Should I transfer my current IRA to a Roth IRA?”

The answer of course depends on your situation. Consider the following:

1.   When you transfer an IRA to a Roth IRA this is a fully taxable event. If you are unable to pay the tax due without dipping into your funds to pay the IRS, this may not be a wise move.

2.   If you withdraw from the Roth IRA during the first 5 years after conversion, penalties may be due. In addition the key purpose of a Roth IRA is that it allows for tax-free accumulation of assets. If you start substantial early withdrawals, this defeats the purpose of the Roth IRA.

Next Chapter: Insurance and Asset Protection

Financial Concerns for Retirement by Kelly C. Ruggles

©2007, Kelly C. Ruggles | Sitemap | Disclosure | Kelly Ruggles Bio
Kelly C. Ruggles, President of American Reliance Group, Inc., is a registered investment advisor. Mr. Ruggles is the author of "The Financial Playbook" for Retirement.

Mr Ruggles does not intend to provide personalized investment advice through this publication and does not represent that the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.