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Health & Fitness

5 Costly Retirement Planning Mistakes

Joe Lucey identifies first 5 of 10 common but costly mistakes made with retirement investments.

I’ve had enough. In the 15 years that I’ve helped families transition to retirement, I continue to see the same costly mistakes repeated by families with their retirement accounts. You’ve sacrificed and worked hard to build up your retirement nest egg and these frequent errors can steal your savings and cost you plenty. While this is not an exhaustive list, it highlights the repeat offenders Secured Retirement Advisors sees most often.  We will begin with the top five this week and round out the top ten with five more next week so stay tuned!

 1- Required Distribution Mistakes 

You made tax deferred contributions into your IRA and other retirement accounts, enjoyed tax deferred growth, but once you reach 70 1/2 years of age, whether you want to or not, you need to start taking your money out. Should you forget, you will be penalized 50% of your required distribution (in addition to what you are required to take out). When you compare this to a pre-59 1/2 year olds’ withdrawal penalty of a mere 10%, you know the IRS is serious. Don’t forget to make these important adjustments to your retirement income plan so you don’t get caught off guard.

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 2- Missing a Chance to Catch Up

Retirement plan owners age 50 and older can make additional “catch up” contributions which can really make a big difference in preparing for the transition into retirement. Traditional 401(k) participants can make an additional $5,500 contribution per year. IRAs and Roth IRAs allow an additional $1,000. Don’t forget your spouse, as separate “spousal” IRAs and Roth IRAs can be established for spouses with little or no income up to the same limits as the working spouse.

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3- Avoid Penalties on Pre-Age 59 ½ distributions

Another trap people fall into is automatically rolling a company sponsored plan immediately into an IRA.  Because IRA accounts are much more restrictive, consider whether or not you need to access money from your old employer’s account prior to automatically rolling the funds. While exceptions are made in IRA accounts for education, first home purchases, health insurance (if unemployed), or through Section 72T (substantially equal periodic payments based on life expectancy), distributions prior to age 59 ½ are penalized 10%. Company plans (401(k)s, 457 and 403bs) allow penalty-free access to terminated employees at age 55 and former Public Safety Employees may have penalty free access as early as age 50.

Additionally, all plans allow access penalty-free for death, disability, health expenses, IRS liens, and to active duty reservists as long as conditions are properly met. Consult with an advisor that specializes in retirement planning prior to accessing your IRA money if you are unsure. 

4- Another reason Not to Auto Roll

If company stock is rolled into an IRA, future distributions are taxed as ordinary income. If, instead, the company stock is taken as a lump-sum distribution from the qualified plan, only the cost basis of the stock is taxed as ordinary income. This is called Net Unrealized Appreciation (NUA). Distributions from a qualified plan such as a 401(k) are generally taxed as ordinary income. Unrealized capital appreciation (the difference between the cost basis and current fair market value) is not taxed until the stock is sold, upon which it would be taxed as long-term capital gains, which are generally taxed at a lower rate than ordinary income. Rules on this are tricky so be sure to talk with your tax advisor.

5- Loans

Think twice prior to borrowing from your employer’s sponsored retirement plan. At termination of employment, whether by choice or not, loans must be repaid in full to avoid taxation.

 

There you have it, five of the most common mistakes we frequently see at Secured Retirement Advisors regarding IRAs and retirement plans.  Be sure to check out next week’s blog for the last five mistakes rounding out our top ten list.   Hopefully these tips are helpful and will enable you to avoid some of the frequent mistakes made in retirement accounts.  

Secured Retirement Advisors offers a personalized and comprehensive financial plan for families in or nearing retirement so they can live their retirement years with security - without worrying about their money.  If you would like a complementary “3 Step Review” of your own retirement plan, call Secured Retirement Advisors at 952-460-3260.

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