Five Costly IRA and Retirement Plan Mistakes and Easy Ways to Avoid Them
• Mistake 1: Leaving Your Retirement Plan at your Company
Many people just leave their retirement plan at their company when they retire. Unless the plan offers you investment options you cannot get on your own this might not be a good idea. While the IRA rules are quite clear on the ability of your heirs to take your money out over their lifetime many company plans don’t follow this logic. To avoid the added complexity they force your heirs to take the money out immediately, or within a short time period. This causes an immediate tax bill and the loss of years of tax deferred growth. If you are determined to leave your plan at your company please call your benefits department and find out what happens to your plan balance when you pass away.
• Mistake 2: Assuming Your IRA Custodian Knows What You Want
Many IRA custodians will unknowing mess up your IRA distribution plans. An example will illustrate the point. Let’s say you have a son, Harry, and a daughter, Jane. They are the primary beneficiaries of your IRA. If Harry predeceases you, you would probably want his share to go to his family. However, many IRA custodians would give his entire share to Jane, freezing Harry’s family out completely. How can you avoid this? Call your IRA custodian and find out how they handle this issue. If you don’t like the answer your attorney can prepare a document called a retirement asset will which will set forth exactly what you want to happen with your IRA.
• Mistake 3: Taking More Than the Required Minimum Distribution
Once you turn 70 ½ you are required to start taking money out of your IRA. However, after age 59 ½ you are allowed to take money from your IRA without penalty (income taxes still apply). This leaves many people with a dilemma, just because you are allowed to take money out does that mean that you should? In most cases the answer is no. The longer you can leave this money to grow without tax the better. If you need to supplement your income and have other assets it is usually best to use those first.
• Mistake 1: Leaving Your Retirement Plan at your Company
Many people just leave their retirement plan at their company when they retire. Unless the plan offers you investment options you cannot get on your own this might not be a good idea. While the IRA rules are quite clear on the ability of your heirs to take your money out over their lifetime many company plans don’t follow this logic. To avoid the added complexity they force your heirs to take the money out immediately, or within a short time period. This causes an immediate tax bill and the loss of years of tax deferred growth. If you are determined to leave your plan at your company please call your benefits department and find out what happens to your plan balance when you pass away.
• Mistake 2: Assuming Your IRA Custodian Knows What You Want
Many IRA custodians will unknowing mess up your IRA distribution plans. An example will illustrate the point. Let’s say you have a son, Harry, and a daughter, Jane. They are the primary beneficiaries of your IRA. If Harry predeceases you, you would probably want his share to go to his family. However, many IRA custodians would give his entire share to Jane, freezing Harry’s family out completely. How can you avoid this? Call your IRA custodian and find out how they handle this issue. If you don’t like the answer your attorney can prepare a document called a retirement asset will which will set forth exactly what you want to happen with your IRA.
• Mistake 3: Taking More Than the Required Minimum Distribution
Once you turn 70 ½ you are required to start taking money out of your IRA. However, after age 59 ½ you are allowed to take money from your IRA without penalty (income taxes still apply). This leaves many people with a dilemma, just because you are allowed to take money out does that mean that you should? In most cases the answer is no. The longer you can leave this money to grow without tax the better. If you need to supplement your income and have other assets it is usually best to use those first.
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