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 — a certified financial planner professional is a good start — to review your overall retirement options and give you some ideas where to begin.
Here are some common mistakes people make:
• Failing to start: It is amazing how people find 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 can grow to something larger.
• Failing to link your work and personal retirement portfolios: One critical problem in retirement planning comes from failing to treat the investments you make in an employer-sponsored plan and your personal retirement savings as a unified whole. Working with a financial planner can help you look at all of your retirement savings and find 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 benefit retirement 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 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 reinvest 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.
• Early withdrawal from an IRA or making a rollover error: Money taken out of an IRA is subject to income taxes and a penalty if you are under 59½ 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 have 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 everyone can afford to contribute the maximum allowed by their respective work retirement plans or individual retirement investments, but it should be a goal.
Erin Eddins is a chartered financial consultant, a member of the Financial Planning Association and is a certified financial planner. She has more than 20 years of experience working with individuals and families to develop financial plans and implement investment portfolios. She can be reached at firstname.lastname@example.org or 425-212-5986.