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Business // Thinking Smart
David S. Chang

Top Retirement Account Errors

Last week I covered top mistakes investors make (artofthinkingsmart.com). In addition, there are common mistakes people make with their retirement accounts. In order to make the most of your Qualified Retirement Accounts – traditional, Roth and Self-Employed (SEP) Individual Retirement Accounts (IRAs), 401(k), 403(b), etc. – requires knowledge of the laws and how to use them.

Here are the most common retirement account investor mistakes, which prevents them from maximizing their money.

1) Withdrawing early from your retirement accounts.

Times may get tight financially, but your retirement accounts should be the last place to take money from. Between 2004 and 2010, early withdrawals doubled from $30 billion to $60 billion, with one in four workers dipping into their accounts.

Retirement accounts are designed to remain untouched until you reach 59-and-a-half, and also have a maximum amount you can contribute per year. If you take out money before then, you will be hit with a 10 percent penalty (with a few exceptions).

In addition to the penalty, you will not be able to re-contribute what was taken out, resulting in a double whammy. Even if you borrow against your retirement account as some may allow, the extra fees and interest can hurt your retirement savings in the long run.

2) Not maxing out. Each retirement account has a maximum contribution limit. Visit artofthinkingsmart.com to see the amounts. With the exception of the Roth IRA, contributions are tax deductible, so you can save money while lowering your tax bill. Once the contribution deadline passes, however, you cannot make it up. This lowers the potential tax savings and the growth earned through compound interest.

Many also mistake the contribution deadline to be Dec. 31, but it is actually the tax-filing deadline, April 15 of the following year. This gives investors additional time to contribute to the previous year.

If you are over age 50, there is an additional catchup amount that will allow you to contribute more. Take advantage to boost your investments!

3) Not rolling over properly.

When you leave your job, you can roll over your 401(k) or 403(b) to an IRA. However, if you do not do a direct rollover to another custodian and receive the money first, you will have to pay a 20 percent withholding tax and have only 60 days to move it to another qualified account. If you miss the deadline, you will have to pay ordinary income tax and an additional 10 percent penalty if you are under 59-and-a-half.

Consolidating your retirement accounts, if you are able, may be wise for your overall investment strategy.

4) Procrastinating. Understanding the laws can help you maximize your retirement accounts, but if you wait to put money in, that can hurt you more!

Regardless of market performance, studies show that contributing consistently is the greatest method toward long-term investing success.

Even if it is a small amount, it is important to be committed and get in the habit of saving, gradually increasing to the maximum amount.

Also, don’t assume you can’t contribute if you don’t work. If you have a spouse who works, you can still open an IRA as long as contributions from both spouses are not more than the combined taxable income.

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