Dangerous Retirement Plan Mistakes

| February 24, 2016
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Retirement planning is a tricky area because it involves taxes, penalties and tons of rules, so you need to be very careful. Today I am going to cover some of the most dangerous mistakes we want to help you avoid in retirement planning.

When people think of mistakes in the area of retirement planning, they likely think about investment losses. Would it surprise you to know that costly mistakes happen because people are ignorant with the rules on retirement accounts? Then they get nailed with taxes and penalties because they didn’t know any better.

We want to help you avoid those kinds of problems, so I’m going to cover some of the most dangerous mistakes you can make with your retirement accounts. 

  1. Not naming beneficiaries on your retirement plan or IRAs. If you are not sure you have named beneficiaries, you should check on this immediately. Not naming beneficiaries can cause the plan to be unnecessarily taxed. It also jeopardizes the chance for beneficiaries to utilize an inherited IRA, which can be a huge tax saver. This is an unnecessary waste of your hard earned money that is simply fixed by naming beneficiaries on your plans.
  2. Next is not being aware of a potential tax saving feature called Net Unrealized Appreciation (NUA). If you have highly appreciated company stock (not mutual funds) in an employee-sponsored plan (like your 401k plan) NUA may help you save taxes. But once you roll your money out of the plan, NUA is no longer an option for you. Call us if you need more details on NUA.
  3. Indirectly rolling over more than one IRA within 12 months is no longer allowed anymore. This can really throw a wrench in your retirement engine. We only recommend trustee-to-trustee transfers, not indirect rollovers.
  4. Not paying back a loan against your 401k according to plan terms. This can cause the loan to be treated as a taxable distribution and if you’re under age 59 ½, an early distribution penalty of 10%.
  5. Speaking of ages, watch out for these age related penalties: for IRAs you must be age 59 ½ before you can take a distribution without a 10% early penalty (unless you have an exception). At age 70 ½ you must start taking mandatory distributions from your traditional IRA or there is a 50% penalty on the missed required distribution – yes 50%!!
  6. Some people think you can use the first time home buyer exception or the higher education exception with their employer plan to avoid the 10% early withdrawal penalty. It won’t work. These exceptions only apply to distributions from IRAs and never employer plans.
  7. Finally, the biggest mistake of them all is not transferring your employer sponsored retirement plan to an IRA properly. If this is not transferred properly, it can cause the entire balance to be taxed with possible penalties too! Some of you have pretty sizable plans. Your employer may be required to withhold 20% of the balance. It gets pretty ugly. Remember, you spent 30 or 40 years building this up, so be sure and work with someone that is very experienced in this area.

As you can see, retirement planning is not just about picking investments for your IRA or 401k plan, but involves many other important issues. If you need assistance with your retirement planning or have questions about these topics, please contact us.

Thanks for reading!

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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