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Five Mistakes to Avoid Making
with Your Retirement Assets

For many years you have been doing a good job of saving money in your company retirement plan and Individual Retirement Account. But how much do you really know about the process of pulling out the income from what you have saved or passing it on to your beneficiaries?

"Very little" is the answer most people give, according to surveys of plan participates by employee benefits groups. If you do the wrong thing or do not do anything, you and your beneficiaries may end up receiving a lot less than you expected.

Here are five of the worst mistakes you can make with retirement assets and how you can avoid them.

1. Not understanding your options when you leave a company:
   
   You have worked hard, put in your time and earned every dollar that has accumulated in your retirement account. Now that you are leaving your job, it is up to you to make the most of that hard-earned money.
   
   Many people do not understand there are more possibilities than just cashing out your account and paying ordinary income taxes on your retirement savings. Retirement plan distributions are subject to ordinary income tax and, if applicable, an additional 10% federal tax penalty on early withdrawals. Many states will charge additional taxes and possible penalties, reducing your bottom line even further.
   
   Here's what can happen when you cash out a $20,000 balance. First, your employer, by law sends 20% to the IRS in withholding taxes, leaving you with $16,000. If you are in the 25% tax bracket, you have to pay the IRS 5% more the rest of the federal taxes owed. That leaves you with $15,000. If you are under age 59 1/2, you may also have to pay the IRS a 10% early withdrawal penalty. That would leave you with $13,000 of your original $20,000 balance. You have also given up the opportunity to let your savings and earnings continue to grow tax-deferred over time.
   
   Solution: Talk with your financial advisor. Fortunately, there are three ways to defer paying a large amount of taxes all at once and to avoid penalties on your retirement savings account. You can transfer the account's funds into a rollover IRA, move it into your new employer's retirement plan or stay in your old plan. Let's look at the benefits of each of these three options:
   
   Rolling over to an IRA
   If you leave your job and want your retirement money to continue growing without paying taxes on it now, you can roll over the money that has accumulated in your retirement plan account into a Traditional IRA. When you do this, you are creating what is called a rollover IRA.
   
   The Benefits include:
   
   • Continued tax-deferred growth of your savings
   • Consolidation of your retirement savings in one place.
   • A wider range of investment choices than is usually available in most company plans.
   • Greater control over your investments.
     
     An IRA generally has fewer limitations and rules than an employer-sponsored retirement plan. For example, penalty-free early withdrawals from a Traditional IRA are allowed for a qualified first-home purchase (up to $10,000), higher education, disability and certain health insurance and medical bills.
     
     How do you move the funds from a company retirement plan to a rollover IRA? The most efficient way is a direct trustee-to-trustee transfer. Once this process has been initiated, your former employer cuts a check and sends it directly to your to your new custodian or trustee (the firm that is responsible for holding your money). Because the check never comes to you in your name, you defer paying taxes on it.
     
     Moving into your new plan
     You can move your vested savings from employer to employer, regardless of whether it is a 401(k), 403(b) or some other plan. If you have made after-tax contributions to your account, they may be directly transferable too.
     
     Doing this protects your savings from taxes for the time being and allows your account the opportunity to continue growing tax-deferred. There may also be other benefits. If your new employer's plan allows salary deferrals, you can continue to contribute to your retirement next egg through the plan. Moving your savings into your new plan also gives you the convenience of having all of your assets with one provider. And your account information is contained in one handy statement, not several.
     
     Leaving it in your old plan
     As another option, you may be able to leave your retirement balance in your old retirement plan (assuming you have more than $5,000 in your account). If you have $1,000 or less, your retirement account and send you a check for the proceeds, and if you have more than $1,000 but less than or equal to $5,000, your employer may roll your retirement account into an IRA with a provider of their choosing.
     
     The benefits of staying? You will continue to give your savings the opportunity to grow tax-deferred, avoid paying current taxes and possible penalties, and remain in the plan's investments you already know. There are, however, some restrictions: Your investment choices are limited to what's available in your old plan. You won't be able to make new contributions to your previous employer's plan or possibly take loans from that plan account because you are no longer an employee.
     
     You must follow your old plan's rules for such things as making exchanges and withdrawing your money.
     
2. Making an improper beneficiary designation.
   Many investors make mistakes by incorrectly filing out or neglecting to update their beneficiary designations for their retirement plan accounts and IRAs. Failing to understand, complete and update your beneficiary designations can be serious.
   
   Here are some common pitfalls with beneficiary designations and what can happen as a result upon the IRA owner's death:
   
   "I left my beneficiary designation blank"  Where the assets go will depend on the custodial agreement or plan document that governs your retirement plan assets. That may or may not be what your had intended.
   
   "I put my estate as the beneficiary designations" The IRAs assets could end up in probate court along with the rest of the estate. There may not be any opportunity for your surviving spouse to roll the IRA over. The beneficiary may have to take out the money over a shorter period than planned.
   
   "I named my spouse as my beneficiary years ago and haven't updated my beneficiary designation since my divorce." In the event of your death, spouses and children may become involved in a bitter legal battle over the assets.
   
   It is very important, therefore, to review beneficiary designations regularly. Any significant change in your life - marriage, divorce, birth of a child or grandchild, or death of the beneficiary - calls for another look at the beneficiary designation.
   
   Solution: Ask your financial adviser for help in making sure your beneficiary designations are properly filled out. Your financial adviser can download beneficiary designation forms, a beneficiary calculator and instructions. Complicated financial situations may call for additional assistance from an estate-planning attorney or tax advisor.
   
3. Not taking your required minimum distribution from an IRA when you reach 70 1/2. Taking the wrong required minimum distributions and missing important dates for distributions are common errors that individuals make, accountants say.
   
   After you reach 70 1/2 , the IRS says you must begin taking payments from your Traditional or SIMPLE IRA, whether you need the money or not. The annual payment you need to take is called your required minimum distribution (RMD) and is calculated each year according to IRS guidelines. You can always take more than the minimum, if you take only your RMD, the remaining part of your account balance can continue growing tax-deferred.
   
   If you don't take the required minimum distribution amount each year, the IRS will penalize you with a 50% tax on any amount that should have been withdrawn but wasnýt. For instance, if your RMD is $3,000 and you withdraw only $2,000, the IRS will access a penalty of $500 (50% of the $1,000 shortfall).
   
   Solution: By taking only the required minimum distribution you lower your tax exposure and give your retirement savings more time for potential growth. You can also invest the required minimum distribution taken from your retirement account in a non-retirement account as a way to stretch its financial benefit. However, keep in mind that any income from reinvested distributions may be taxable. What you canýt do is roll any income form a required minimum distribution into another IRA or retirement plan.
   
   Many retirees leave the work force with savings in both after-tax and tax-deferred accounts. If you have enough income from after-tax accounts and other sources, you may want to save the distributions from your tax-deferred accounts for last.
   
   Talk to your financial adviser about when and how to take your required minimum distributions.
   
4. Not understanding the beneficiary's distribution options. Too many investors have neglected to take advantage of an IRA distribution and income-planning strategy that can spread the benefits of an ownerýs IRA over several generations.
   
   Consider the case of a 75-year old woman who died with $500,000 in her 401(k) account. The terms of the retirement plan caused her two grown sons, as beneficiaries to take out the money sooner than they had planned.
   
   Solution: If she had rolled that money into an IRA when she retired, then upon her death, her sons would have had the option of withdrawing their inheritance over their own lifetimes - - prolonging the opportunity for its tax-deferred growth by decades.
   
   You can turn an IRA that you wonýt need as a source of retirement income into a powerful estate-planning tool. The key is withdrawing the smallest amount of money the IRS allows each year as your required minimum distribution. Through proper beneficiary designation and distribution planning, your beneficiary can continue to stretch the income from the remaining IRA balance by taking only the required minimum distribution each year.
   
   When you and your beneficiaries stretch the income from an IRA:
   • Required minimum distributions can be made over more than one personýs lifetime.
   • You and your beneficiaries will pay income taxes only on the amount withdrawn each year.
   • The undistributed balance in the IRA has the potential to grow tax-deferred.
     
     Your financial adviser can help you make the right decisions for your unique financial and tax situation.
     
5. Outliving your money:  Some investors miss completing the final step in the rollover IRA process. They have followed the rules, completed all the proper forms, chosen their beneficiary carefully and transferred their funds safely to their new rollover IRA without a hitch. But they have forgotten to re-evaluate all their investments and holdings to make sure they are diversified and have an appropriate asset allocation for their time horizon, risk tolerance and financial situation.
   
   Solution: Call your financial adviser to thoroughly review all your investments. Is the mix of stock and bond mutual funds the right one for your current and future cash-flow needs? You need to meet with your financial adviser annually to make sure you stay on track to achieve your retirement goals.
   
   Deferring taxes and avoiding penalties are important, but who you select to manage your hard-earned dollars is a key component in whether you will reach your long-term goals. Your investment manager should have a proven record of above average, long-term results and be able to deliver them at a low annual cost.
   
   A massive transfer of wealth will take place between generations in the next six years. Itýs been estimated that roughly 2 trillion will leave employer-sponsored retirement plans to move to IRAs.
   
   Through their IRAs, investors can leave a powerful legacy that may last over their loved onesý lifetime and beyond; but only if they and their beneficiaries make the right decisions.

The material presented on our web site may contain concepts that have legal, accounting and tax implications. It is not intended to provide legal, accounting or tax advice, you may wish to consult a competent attorney, tax advisor, or accountant.