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Don't Make These Retirement Planning
Mistakes
It really doesn't take much to derail a retirement plan. Most
of the errors in planning for retirement are those of neglect,
omission or panic. If you don't know exactly where your
retirement plan stands, get some advice — a CERTIFIED FINANCIAL
PLANNER™ (CFP®) professional is a good start — to review your
overall retirement options and give you some ideas where to
start.
Here are some common mistakes people make:
Failing to start. It is amazing how many people find
so many excuses never to start retirement savings. But no matter
how daunting debt or other spending priorities seem, you have to
save for retirement on a regular basis, even if it's only a
cursory amount. Over time, those small assets will grow to
something considerably larger.
Failing to link planning for your at-work and personal
retirement portfolios. One of the critical problems in
retirement planning comes from failing to treat the investments
you make at work versus the ones you make independently as a
unified whole. Working with a financial planner can help you
look at every place you're putting your money and finding out if
you're implementing those assets in the right way.
Failing to evaluate a prospective employer's retirement
options. Benefits can be worth as much as a nice paycheck.
It's possible you might be working for a company that still
offers a traditional defined pension benefit plan in addition to
a 401(k) plan. If you think you're going to get an offer, it's
wise to interview prospective employers on the benefits side of
what they're offering you — particularly the timeframes on when
those various benefits kick in. Above all, company matching of
any assets you place in your retirement funds is key as well as
the vesting period for making those assets your own.
Failing to consider both kinds of IRAs. The biggest
difference between a traditional IRA and a Roth IRA is the way
Uncle Sam treats taxes on both types of IRA investments. If you
put money in a traditional IRA, you'll be able to deduct that
contribution on your income taxes. In a Roth, you don't receive
the tax deduction for those contributions, but when it's time to
take the money out, you won't have to pay taxes on it. If you
and your spouse are not covered in workplace plans, you may be
able to fund fully deductible IRAs. Talk to a tax professional
or a financial planner about which options are best for you.
Failing to update your beneficiaries. Starting in
2007, a direct transfer from a deceased employee's IRA,
qualified pension, profit-sharing or stock bonus plan, annuity
plan, tax-sheltered annuity, 403(b) plan or a governmental
deferred compensation plan to any qualified IRA can be treated
as an eligible rollover distribution if the beneficiary is not
the deceased's spouse. That means your kids or any other
designated recipient can inherit your IRAs without negative tax
consequences at that time. Non-spouse beneficiaries need to
check with a tax expert when they must begin distributions from
an inherited IRA. Of course, no matter what the investment, make
sure your beneficiaries are always current.
Failing to reinvest your tax refunds. Did you know you
could deposit your tax refund directly into your IRA? It works
for a health or education savings account as well. While many
people use their tax refund as a bonus to buy a treat or pay off
bills, consider filing your taxes a bit early and arrange to
e-file a direct deposit to your IRA so you can note that deposit
for the 2007 tax year by next April 15.
Withdrawing money early from an IRA or blowing a rollover.
Money taken out of an IRA is subject to income taxes and a
penalty if you are under 59 ½ years of age and do not put it
back into an IRA within 60 days. When moving assets, most of the
time a trustee-to-trustee transfer can be more efficient and
with less margin for error. If the IRA distribution check is
made payable to you, there is a greater chance you'll miss the
60-day deadline and you'll face taxes and penalties.
Failing to contribute the maximum. Not every employee
can afford to contribute the maximum allowed by their respective
work retirement plans or individual retirement investments, but
it should be a goal.
May 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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