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Expert Insights for Smart Financial Planning

6 Costly Retirement Planning Mistakes

Be sure to avoid these common errors.


Retirement planning can be a tricky area to navigate because it involves hundreds of rules, and violating them can result in unnecessary taxes and penalties. Couple this with the fact that the majority of people are unfamiliar with this maze of rules and regulations, and it's not surprising that many retirees have made some costly errors in their golden years.

See Also: 10 Financial Decisions You Will Regret in Retirement

Knowing the most common mistakes that are made is an important step to avoiding them. Here are six costly errors to watch out for:

1. Not having beneficiaries on a retirement plan or IRA.

If you are not sure whether you have beneficiaries on your accounts, you should check this immediately. Not naming beneficiaries can cause the account to go through probate where the average cost to heirs can be as high as 6% of the account value. It also stops the heirs from taking advantage of the inherited IRA option for non-spouse beneficiaries, which can be a huge tax saver.

2. Missing out on Net Unrealized Appreciation.

NUA is a potential tax savings feature that applies to common stock held in an employer-sponsored retirement plan, such as a 401(k). If done correctly, it allows you to withdraw highly appreciated stock from the employer plan and pay capital gains rates on the appreciation while paying ordinary income tax on the basis. If the majority of the stock's value is from appreciation, NUA can be a great tax saver. But it must be done before the retirement account is rolled over to an IRA.


3. Indirectly rolling over more than one IRA within a 12-month period.

Doing so is no longer allowed. This is sometimes called a 60-day rollover, for which you take receipt of the proceeds before putting them back into a new IRA. Additional 60-day rollovers will be disallowed, and worse, they'll be fully taxed, and if the IRA owner is under age 59½, they may be subject to a 10% early withdrawal penalty. With this new rule, it is now much better to only use trustee-to-trustee transfers, which are unlimited, for which you never take receipt of the proceeds.

4. Not paying back a loan from your 401k before rolling it over to an IRA.

This move can cause the loan to be treated as a taxable distribution, and if you're under age 59½ it will also trigger a 10% early withdrawal penalty.

5. Forgetting your age.

Watch out for age-related penalties. For employer-sponsored plans and IRAs, you must be age 59½ before you can take a distribution without a 10% early penalty, unless you have an exception. The first time home buyer exception and the higher education exception allows you to avoid the 10% early withdrawal penalty for taking distributions before age 59½. But these exceptions apply only to IRAs, not employer plans. Trying to use these exceptions for an employer plan will trigger the penalty.

At age 70½ you must start taking annual required mandatory distributions from your traditional IRA, or there is a 50% penalty on the missed required distribution!


6. Rolling over a company retirement plan to an IRA incorrectly.

If the rollover check is made out to the employee instead of the IRA custodian, the IRS requires that 20% of the distribution be withheld. Although the employee will get the money back next year as a refund, if he wants to rollover the entire amount he must come up with the dollars withheld out of his own pocket. Otherwise, the employee will owe taxes on what's not rolled over, and if he's under 59½ he'll owe a 10% penalty. Make sure the check is made out to the IRA custodian and you will avoid this small nightmare.

Mistakes can be expensive when it comes to retirement planning. To prevent them it's important to familiarize yourself with the rules or work with a financial planner who is a retirement specialist.

See Also: 15 Worst States to Live in During Retirement

Mike Piershale, ChFC, is president of Piershale Financial Group in Crystal Lake, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs.

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