6 steps Baby Boomers should take to prepare for IRA changes

Bill Clinton, Cher, Candice Bergen, Andrea Mitchell—household names in the world of politics, entertainment, and journalism—are, along with thousand of your members, reaching age 70 this year.

As the first of the baby boomers to reach age 70, the 3.4 million Americans born in 1946 will reach a significant milestone and face significant IRA changes. Starting in the year that they reach age 70½, these baby boomers will no longer be able to contribute to a Traditional IRA, and instead, must begin taking required minimum distributions (RMDs) from their Traditional IRAs.

These two significant IRA changes—and the number of IRA owners impacted by them—provide credit unions with an opportunity to reconnect with and provide assistance to an important member demographic and make enhancements to their IRA programs to better meet the needs of this growing demographic.

And, it also provides an opportunity for credit unions to evaluate their IRA program operations and make adjustments in light of these changes. This may include adjustments to reflect a drop in contribution activity and an uptick in withdrawals, additional staff time and postage costs to handle RMD mailings, and compliance and legal support associated with increasing numbers of IRA death claims.

Following are steps that your credit union can take to prepare your IRA program and your IRA owners for this demographic shift:

  1. Educate IRA owners and credit union IRA staff on IRA eligibility requirements. Starting in the year that they reach age 70½, IRA owners are no longer able to contribute to a Traditional IRA. They may or may not know this, so it is important that credit union IRA staff understand the IRA contribution rules, so that they are able to provide IRA owners with accurate information. As many baby boomers plan to work into retirement, they may benefit from making Roth IRA contributions, which unlike Traditional IRA contributions, are permitted after age 70½, if the IRA owner has compensation.  And, even if the IRA owner can no longer make Traditional IRA contributions, his or her nonworking spouse under the age of 70 may be able to rely on the working spouse’s compensation to make a spousal contribution to his or her Traditional IRA.
  2. Update IRA owner information on your data processing system. Many of your IRA owners reaching age 70 this year will have opened their IRAs in the early 1980s, when IRAs first became available to most working Americans. After nearly 35 years on your books, many of these accounts lack current contact information, dates of birth, etc. Make sure that you update account information to obtain the IRA owner’s correct date of birth, if you don’t have it, in order to meet the RMD reporting requirements. And, if you don’t have dates of birth and relationships for IRA beneficiaries, obtain this information as well to ensure that you can correctly compute the IRA owner’s RMD.
  3. Review your RMD processes and procedures. Under the tax laws, you must provide an RMD statement to the IRA owner by January 31 of the year for which an RMD is required and report to the IRS that an RMD is required for the IRA owner. The IRA owner, however, is responsible for taking their RMD by the deadline. In some cases, you may be required to make payment of the RMD to the IRA owner, if your IRA agreement has language requiring that your credit union make RMD payments. Even though credit unions provide IRA owners with an annual RMD statement, a recent report from the Treasury Inspector General for Tax Administration found that many IRA owners fail to take their RMD because they are unaware of the RMD requirements. In addition to providing IRA owners with an RMD statement, some credit unions choose to provide educational materials that cover the basics of RMDs, including the withholding requirements applicable to RMDs, penalties for failing to take an RMD by the deadline, and the option to delay the first year’s RMD payment to April 1 of the following year, convert a Traditional IRA to a Roth IRA to avoid the RMD requirement, and use a qualified charitable distribution from a Traditional IRA to satisfy the owner’s RMD for the year.
  4. Update beneficiary information. Baby boomers have led active lives and their IRA beneficiary forms may not reflect their life changes or current wishes. Upon the death of an IRA owner, credit unions and the IRA owner’s family often discover that the credit union lacks beneficiary information, or worse yet, the beneficiary information is outdated. Former spouses may still remain as the named beneficiary, children born of a subsequent marriage may not be listed as a beneficiary, and parents named as a beneficiary when the IRA owner was single may now be deceased. And, in many cases, beneficiary name and address information is not current, making it nearly impossible for the credit union to contact the rightful recipients of the IRA assets. Credit unions should use this important milestone to urge their IRA owners to update their beneficiary information.
  5. Encourage IRA owners to consolidate multiple IRAs at your credit union. Over the past 30 plus years, many individuals have accumulated multiple IRAs and retirement plans, such as a 401(k) plan or 403(b) plan. While an IRA owner can calculate the RMD separately for each IRA they own and take the total of all RMDs from any combination of IRAs owned by the individual, there are many benefits to consolidating multiple IRAs into a single IRA, including reduced maintenance fees, streamlined administration, and having a single point of contact for IRA questions. Inform your IRA owners of the benefits of consolidating their IRAs at your credit union and make it easy for them to consolidate multiple IRAs through the use of a trustee-to-trustee transfer. Credit unions would be well-advised to carefully review the Department of Labor’s recently-released final fiduciary rule to determine how it will affect their policies and procedures related to IRA rollovers.
  6. Develop a long-term IRA strategy that addresses the aging baby boomer demographic. In just 13 years, by the time all of the baby boomers have reached age 65, more than 20 percent of the U.S. population will be over age 65. This demographic shift will require credit unions to review their long-term IRA strategy, with the focus shifting from asset accumulation to asset decumulation. If your credit union uses IRA assets to fund your loan portfolio, you’ll need to look for alternatives to offset reduced IRA contribution activity and increased distribution activity. Equally as important as accumulating enough assets to ensure a financially secure retirement is managing the decumulation of assets to ensure that the IRA owner does not outlive his or her retirement assets. If your credit union has an investment or wealth management division, you are well-positioned to help your IRA owners ensure that they manage the decumulation of assets in a way that ensures that they do not outlive their retirement assets.

The Economic Recovery Tax Act of 1981 allowed all working taxpayers to establish IRAs and ushered-in an unprecedented era of IRA growth. Now, 35 years later, the first of the baby boomers reaching age 70 will usher in an unprecedented era in RMD growth, as the IRS requires the baby boomers to begin withdrawing their Traditional IRA assets. This demographic shift will be just as important for your IRA program and your IRA owners as the legislative change 35 years ago that allowed all working taxpayers to establish IRAs.

Dennis Zuehlke

Dennis Zuehlke

Dennis is Compliance Manager for Ascensus. Mr. Zuehlke provides clients with technical support on tax-advantaged accounts (including individual retirement accounts, health savings accounts, simplified employee pension plans, and Coverdell education ... Web: www.ascensus.com Details