As we begin 2014, many of us contemplate our lives with resolutions. For some, this means contemplating or even finalizing a retirement plan resolution.
It 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 to review your overall retirement options and get some idea where to start.
Here are some common mistakes people make:
Failing to start: For younger people, it’s amazing how many find 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 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 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 time frames 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 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: 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 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. Take a beneficiary inventory not only of your primary beneficiaries but also your contingents.
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 younger than 59˝ years old 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 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 one can afford to contribute the maximum allowed by your respective work retirement plans or individual retirement investments, but it should be the goal. You’ll be glad you did.
Have a happy, healthy and prosperous 2014.
Timothy J. Dooley, CFP, is president of Comprehensive Retirement Resources, Inc., an independent firm at 201 N. Draper Road, McHenry. He specializes in retirement and estate planning. Reach him at 815-578-4217.