10 Retirement-Wrecking Moves
Retirement should be a time to relax and enjoy the fruits of a lifetime of labor. Unfortunately, for many people bad decisions push the retirement horizon out of reach. As such, it is imperative that individuals understand the effects of these bad choices and take steps to avoid them. Let's examine 10 mistakes that can sabotage your retirement plans.
Many individuals are forced to postpone retirement because their nest eggs are not sufficient. This can be avoided by starting to save early. The amount you will need to contribute each year depends on how soon you start your savings program.
Even in instances where you can't afford to add the maximum amount that projections determine you need to save for the year, adding what you can afford can go a long way toward reaching your goal. For more, see Compound Your Way To Retirement and Why is retirement easier to afford if you start early?
Thinking it's Too Late to Get in the Game
Some of the common reasons for starting to save for retirement late in the game include pure procrastination, having to start over after a divorce, and getting the opportunity to contribute to a retirement plan for the first time after immigrating to the country at an advanced age. Regardless of the reason, thinking that it's too late will only compound the issue. Instead, you should look for ways to start saving. This may mean doing without many items that are not basic necessities. It is possible for individuals to achieve their post-work goals, even if retirement is just around the corner. For more tips, see Can You Retire In Five Years?
While saving can be challenging, there are many opportunities that make it easier. Unfortunately, many people overlook these opportunities and miss out on the benefits. Big mistake! For example, employers that offer benefits under a 401(k) or SIMPLE IRA often include matching contribution features. However, many employees fail to receive this benefit because of a lack of awareness and understanding. Don't let opportunities to increase your savings pass you by.
Not Considering Healthcare Needs
The need for heathcare increases with age. This includes the need for more frequent check-ups and preventative healthcare, as well as the need for long-term care, both at home and in nursing homes. Individuals who fail to implement contingency planning to cover health-related expenses could find that a large percentage of their savings must be used to cover these costs. Prevent this by ensuring you have adequate health insurance. For related reading, see Failing Health Could Drain Your Retirement Savings.
Spending Too Much Too Soon or Too Late
Those entering retirement are often faced with the fear of spending too much too soon and, as a result, may hoard their savings to the point of just barely getting by. While caution should be exercised to ensure that your nest egg lasts throughout retirement, living on a diet of bread and water takes caution too. On the other hand, individuals who decide to splurge during their early retirement years without any regard for the future may find their bank accounts running dry. For more, see Enjoy Life Now And Still Save For Later.
Making Ineligible Rollovers to Your IRAs
Ineligible rollovers can mean having to pay severe penalties to the IRS. In addition, any taxable portion of the amount rolled over to your IRA must be included in your income for the year the distribution occurred. To ensure that this doesn't happen to you, you need to know which assets are not rollover eligible. For example, a common mistake is to assume that the RMD amount can be taken after the rollover is made. This is not the case because the first amount withdrawn during a year for which an RMD is due includes the RMD amount. For more see Common IRA Rollover Mistakes.
Making Excess Contributions to Your IRA
IRA contributions are limited to the lesser of 100% of eligible compensation or the contribution limit for the year. Should you contribute more than the allowable limit to your IRA, you must remove this excess amount from your IRA by the applicable deadline. Similar to ineligible rollovers, failure to remove the excess amount by the deadline will result in you owing the IRS a penalty of 6% of the amount for each year it remains in your IRA. To learn more, see Correcting Ineligible (Excess) IRA Contributions.
Making Ineligible Roth Conversions
A roth conversion is viewed by many as a good financial planning move because earnings accrue on a tax-deferred basis, while distributions are tax-free if qualified. However, not everyone is eligible for a Roth conversion - certain income limitations apply. If you make an ineligible Roth conversion, it can be corrected as a recharacterization. Should you fail to recharacterize an ineligible conversion on a timely basis, the amount will be treated as ordinary income from your Traditional IRA and an excess contribution to your Roth IRA. Therefore, not only would you lose the tax-deferred status of your IRA assets, but you would also owe a 6% penalty for each year the excess contribution remains in the Roth IRA.
Failing to Distribute Your RMD
You must begin taking RMDs from your Traditional, SEP and SIMPLE IRAs, qualified plan, and 403(b) accounts the year you reach age 70.5. Exceptions apply to qualified plan accounts and 403(b) accounts if you are still employed and your employer allows you to defer beginning RMD from such accounts until after you retire. Failure to distribute your RMD by the applicable deadline will result in you owing the IRS an excess accumulation penalty of 50% of the RMD shortfall. You may apply for a waiver of the penalty, but you are generally required to pay the penalty first and request the waiver thereafter. See Missed Your RMD Deadline?
Engaging In Prohibited Transactions
You are prohibited from using your IRAs in certain transactions. For example, your IRA cannot be used as a loan, serve as security for a bank loan, or be used to invest in collectibles. Engaging in these transactions could result in loss of tax-deferred status for the assets involved in the transaction and, in some cases, loss of tax-deferred status for the entire IRA. Learn more about avoiding prohibiting transactions in IRA Assets And Alternative Investments.