Although I am a financial blogger, I committed many mistakes. although my financial education was solid, still I had my financial bad days. One of them was not having a 401 (k) account or an IRA account as soon as I landed in this country and decided to stay here. Point is, anyone can commit mistakes financially, even experts.
There are many other mistakes people do, USA Today listed a few of them. CBS news claims that their list contains the biggest mistakes. Let me give you some practical advice here for my informed readers. I will not tell you to open a 401(k) account. I know you have a 401(k) or an IRA or Roth IRA, otherwise, that would be the biggest mistake you could do.
Let’s mention some mistakes which even experts commit. Not all, but many, unknowingly or because of negligence. Please read through the above two links to become aware of the most basic error one can do. Once you’re done with those, you can start right here.
We will talk about two very basic retirement account so that even the least informed reader can follow rest of the article easily. and while you become aware of retirement plan mistakes, there’s no harm in going through the best practices of retirement saving.
Definition of IRA (Individual Retirement Plan)
If you are a US employee and your company has a 401 k IRA plan, you have the option to enroll in it. This gives the employer the right to make a contribution to a 401k plan, provided the employee permits an equal deduction from their salary. The combined amounts must be paid into a qualified trust. These combined amounts are sheltered from tax, when the employee leaves the job, for whatever reason, the money in the trust fund allows for a cash withdrawal from the age of 59 ½. It also enables the plan to be moved to another qualified investment or possibly leave it where it is.
For more: beginners guide to IRA.
Definition of a Roth IRA
Roth was the congressman who defended the amendment to the IRA
Contributions are not tax deductible but when the investor makes a withdrawal at retirement age (min 59 ½ years), all proceeds are completely tax free. There’s no age restriction on withdrawing contributions, however, if you’re under 59 ½ you will pay penalties if you withdraw any of the profits from investments. There are restrictions on who is eligible for a Roth IRA: A person submitting as a single cannot earn over $125, 000/year. A married couple cannot earn over $183,000 per year
For more : Choosing between and IRA and a Roth IRA
IF YOU ARE ABOUT TO JOIN AN IRA PLAN, OR IF YOU HAVE ONE, TAKE HEED OF THE FOLLOWING COMMON MISTAKES:
- Not electing to join a Roth plan.
This plan permits tax free withdrawals, subject to the plan’s conditions. You are can make a maximum contribution to a Roth scheme if you earn 110,000 USD or less as a single person or 173,000 USD as a married couple. Distributions will not affect Social Security retirement entitlements. Beneficiaries receive tax free benefits provided they meet the plan’s 5 year qualified distribution rule:
*Distributions have to be made following the 5 year period of the first contribution.
*The payment or distribution is made on or after you reach 59½
*Payment has been made because you are disabled
*Distributions are made to a beneficiary or to your estate when the plan owner dies
*Someone who fulfills the requirement under‘First home under Exception’ rule.
- Forgetting deadlines
If the owner of the plan dies, the beneficiaries must pay any estate tax within 9 months of the death. The beneficiary must be named by 30TH September of the year following the death. The beneficiary who elects to take distribution over a life expectancy must initiatewithdrawals by 31ST December of the year they were named as beneficiary. Missing the deadlines will incur a penalty.
- Making the wrong decision regarding spouse rollovers
When the plan holder dies, it’s generally their spouse who will be the beneficiary. A common option selected is for the spouse is to rollover their inheritance to their own IRA plan. However, in some situations it can be more tax effective to convert it into an ‘inherited beneficiary’ plan or disclaim the inheritance and allow it to pass onto a contingency beneficiary. There are a lot of good ways available on internet regarding this matter, you ca take a help from there.
- Not using the stretch distribution or not implementing it effectively
This option allows the beneficiary of a plan to increase payouts over their lifetime. It is imperative to identify beneficiaries and advise them of the owner’s ‘stretch wishes’.
- Not utilising the contributions increase limit
Limits as to how much you are permitted to contribute change periodically.
- If you are over the age 50
Plan owners are permitted to make additional catch up deposits.
- If you are over the age of 70
You are obliged to take a minimum amount of benefits annually from your IRA plan. This is based on the value of any non-Roth IRAs the owner may have. If it is not taken, owners may be penalized by a 50% tax penalty of the amount that should have been withdrawn.
- Putting the IRA title in a trust
This will result in immediate tax requirements. This includes a 10% penalty if the owner is under 59 ½.
- Omitting to name the beneficiaries.
You must name your main or contingent beneficiaries otherwise your IRA assets can pass onto the estate when you die. This would cost taxes to rise and accelerated distribution. Beneficiaries must be kept up-to-dateor it may result in the wrong person receiving the distribution.
- Not taking up the beneficiaries IRD (Income in respect of a Decedent)
This allows beneficiaries to take a tax reduction relating to estate taxes already paid on the assets pertaining to the IRA.
- Not taking advantage of contributions that can be made by a non-working spouse Separate IRAs can be set up for spouses that do not work. They can contribute up to the same limits as their working spouse.
Last but not the least, you shouldn’t over or under save for your retirement, Some time back I posted about my method of finding out how much is needed in retirement saving, before you retire. I agree that it’s almost impossible to correctly calculate the number, but if you follow the technique I explained there, we may get as close as possible. You may go past the required number, which is a good thing anyway.
So, not knowing the retirement saving target is one of the major mistakes one can make in retirement planning.
I suggest you talk to your financial planner/mentor but, before that know when is the right time for you to retire. May be at the age of 65 or, may be at the age of 50, or even earlier than that. Depending on target age at retirement your planner can calculate a number. If you want to go solo, you can check out my retirement saving calculation post to know the number yourself.
L Bee and the Money Tree says
Great post! I’m about to rollover a profit sharing plan into an IRA and found this ready super useful. Thanks! 🙂
Miss T @ Prairie Eco-Thrifter says
These are great. I am still quite far from retirement but some of these tips actually apply now so they are a great reminder.
Greg Houskeeper says
I have a long way to go before retirement. One thing that I have learned is that planning and strategy is critical if you want to accelerate your retirement.
20's Finances says
Great list – I didn’t know the one about having to withdraw from your IRA over 70. Learning something every day.
Aaron Hung says
I’d love to open a ROTH, as soon as my credit cards are paid off. 401k isn’t going to cut it. Thanks SB:)
Manette @ Barbara Friedberg Personal Finance says
My husband have the option to retire either 10 years or 20 years from today; however, I chose not to set a specific age for retirement. I decided that I will continue to work as long as I can work, save, and invest. My husband and I are confident that our IRA and other investments will help us through our expenses after our retirement.
Diego Petham says
If you already have an IRA, and there’s any pretax money in there, the conversion is pro-rated. You have one Traditional IRA, regardless of ow many accounts it’s in. So, if there’s $15,000 in pretax money already there when you make that non-deductible deposit of $5,000, 75% of the conversion is subject to tax. Even if the money wasn’t co-mingled.
Free Money Minute says
Whatever you do, just make sure you save something consistently over a long time. Everything else is gravy.
Yes consistency is most important. That’s why we suggest to pay yourself first. Before you start spending money in any month, set aside a certain percentage towards saving.