3 Biggest Retirement Tax Mistakes

oopsAttorney Natalie Choate is the guru of retirement benefits. She’s the one who knows all the answers to those super complicated questions about tax and estate planning, and how they affect our IRAs, 401(k)s, and other retirement plans.

Natalie has seen it all, and she knows that those retirement mistakes can be really costly ones.

But here’s the biggest surprise of all.  Most of the things people goof up?  They’re not the complicated things.  They’re the really easy, can’t-miss, bread-and-butter “to-do’s” that don’t get “to-done.”

Here’s what Natalie calls the three biggest retirement mistakes. Make sure they’re not on your “to do” list:

1.  Failure to take a Required Minimum Distribution (RMD)

Our clients know that every year, starting around October, we tackle the Required Minimum Distribution list.  If you’re over 70 1/2 years of age, or are younger than that but are named as a beneficiary of an inherited IRA account, you need to take money out of your IRA.

It’s really not that big of a deal. After all, we’ve been doing this for years. But if you mess it up, you pay a 50% penalty.  That’s why, just like Santa, we make up our list and check it all twice.

Some people working on their own just forget they need to take a minimum distribution, or take out the wrong amount. We’ve heard stories about checks that got lost in the mail, inherited IRAs that heirs forgot all about, and workplace retirement accounts where someone misinterpreted the rules.

The takeaway: The IRS eventually wants you to pay tax on your retirement accounts. Think of them as a pit bull, and your account as the bowl of food. Don’t stand in their way.

2.  Failure to name a beneficiary for your IRA or other retirement plan

Can we even begin to count the ways this can get messed up? Some people neglect to name a beneficiary at all, meaning their assets go to their estate, their third cousin Fred who they despise, or maybe the government’s unclaimed property fund.  Or maybe they forgot to name a contingent beneficiary, so if their primary beneficiary died before them, it’s back to third cousin Fred.

Or they name the “wrong” beneficiary, or the “right” beneficiary in the “wrong” way. That could be the ex-wife, minor children who can’t take title to the property, their estate or a charity or even a poorly-designed trust (which may entail an acceleration of taxes due and a loss of tax benefits for other surviving beneficiaries).

We caught one “bad” beneficiary designation just in time. Very sizable retirement benefits would have passed to a Trust, and not to the surviving spouse. The spouse was able to “stretch” her withdrawals over many, many years, saving thousands in taxes and generating thousands more in additional investment growth.

All these beneficiary designations have consequences, and sometimes those consequences aren’t good.

The takeaway: Do name primary and contingent beneficiaries, but discuss your choices with your attorney and financial advisor to scout out any problem areas.

3.  Mistakes in rolling money from one account to another

It seems so easy, doesn’t it? Move money from Point A to Point B.  But money + people + movement often = mistakes. Do it the wrong way and you’ll get a 20% haircut, or more. And let’s face it. Some of the those companies just do not want to let that money go.

Here’s what Natalie says:

Financial planners perform a great service when they take charge of the rollover and transfer process and make sure the right amount goes to the right account. This isn’t some sophisticated investment or tax idea. It’s just where people goof and where help is really valuable.

 A rollover is not really difficult. But it sure is a lot easier when you do dozens over the course of a year, instead of one every dozen years. Signature guarantees, acceptance letters, withholding instructions, deferred sales charges, in-service distributions, taxable events, trustee-to-trustee transfers … are you sure you really want to go there?

The takeaway: Most rollovers are a piece of cake. But some are like pulling teeth … with pliers. You won’t know which yours is until it’s too late. Don’t go it alone … get expert help.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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