Americans hold huge sums in retirement plans; for many, their 401(k)s and IRAs make up the bulk of their retirement savings.
You worked hard to build retirement savings – make sure you avoid these common mistakes:
- Failing to take distributions on time. Absent any other estate planning strategies, you must start taking distributions from an IRA at age 70 ½. If you don’t take the required distribution, you pay a 50% penalty on the amount you should have withdrawn.
- Delaying distributions. If you are still employed you don’t have to take a distribution from your current employer’s plan, even if you are 70 ½, but you are required to take distributions from IRAs and 401(k)s from past employers. If you don’t you’ll pay a penalty.
- Failing to designate a beneficiary. If you die without naming a beneficiary, the IRA custodial agreement will specify who receives the proceeds. That agreement also may specify that proceeds be paid out relatively quickly, creating a larger tax burden for your heir. Designate a beneficiary and leave benefits in an IRA Trust to control to whom and how quickly funds are distributed.
- Leaving non-IRA funds to charity. Charitable organizations do not pay income taxes on qualified IRA distributions, but your heirs will. Leave IRA funds to charity and “non-retirement funds” to your heirs. In many cases, you can minimize or eliminate the tax burden on your heirs through effective estate planning, especially if you bequeath non-IRA or 401(k) funds.
- Tying up assets in problematic investment types. For example, you may have a portion of your IRA in a CD. If the face value of the CD is sufficiently large you may have to redeem the CD early in order to take a required distribution. As a result you may pay an early withdrawal penalty.
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