Now people have to save up enough money to possibly last up to 30 years. Not only that, but they also have to learn about investing and taxes, plus all the clear-as-mud rules that go along with them.
Some financial advisers focus their entire careers on dealing with retirement issues, and many of them have trouble keeping it all straight. It's no wonder that regular people make mistakes when it comes to their retirement accounts.
Doubling down on tax deferral
There is a time and a place for all investment products, even variable annuities. But do they belong in an IRA, particularly a young person's IRA account?
Some small businesses offer annuities through their retirement accounts. But putting a high-fee, tax-deferred vehicle like a variable annuity inside another tax-deferred vehicle can be expensive and redundant, say many financial advisers.
On the other hand, Douglas G. Neal, a Certified Financial Planner with Neal Financial Group in Houston, believes that putting annuities in retirement accounts can have some benefits.
"We put variable annuities in small business plans because the business owner doesn't want to have to put together a full 401(k) plan. It can be in a SEP IRA," he says.
Generally, 401(k) plans are expensive to administer and require adherence to complex federal regulations. But a SEP IRA is "very simple and (requires) little reporting and no fees for the business owner with, for instance, four or five employees," says Neal.
Making missteps with inherited IRA
Retirement accounts have a special tax status, but the tax benefits can be inadvertently wiped out when you inherit an account.
"If my mother or father leaves me an IRA, I cannot take that money and put it in my own account. I can't transfer it or have it sent in my name," says Radon Stancil, Certified Financial Planner with Diversified Estate Services in Raleigh, N.C.
The rules for inherited IRAs are strict and inflexible. "It can never be in my name. It must be titled under the IRS code as an inherited IRA that would be for my benefit, but always in the name of my parent," Stancil says.
If done properly, heirs can take out minimum distributions over their lifetimes. But if the proceeds are distributed directly to the beneficiary, it is stripped of its tax benefit -- a potentially very expensive mistake.
"If I was making $100,000 a year in a household and I inherited an IRA worth $100,000, then my tax bracket on that money is at the top and I'm going to lose 30 (percent) to 40 percent of that in taxes -- lump sum, that year. And I don't find out about it until January when I get my 1099," says Stancil.
Having rollover regrets
Moving assets from a 401(k) into a special IRA called an IRA rollover can also cause tax troubles if not done right. When you move the money from a 401(k) plan directly to the new account without ever touching a check, it's called a trustee-to-trustee transfer. That's the best method to use to avoid problems.
Investors can also get the money directed to them. If the money is sent as a check in the account holder's name, the account holder has 60 days to put the money into a rollover IRA.
"When I get the money I have to be very careful to do two things. I have to make sure to document that I have the money, and also make sure that I don't go over 60 days," says Stancil.
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Unfortunately, a lot of people miss that very tight deadline.
Keep in mind that account holders are allowed one 60-day rollover per year. The financial institution holding the account won't necessarily keep track of when your last 60-day rollover took place. So it's your responsibility to keep track.
If you think it's been a year but it's really only been nine months, the money will lose its tax status and you'll end up paying the IRS.
Withdrawing too much money
After a lifetime of saving you may think at age 55 or 60 that it's time to start siphoning some of that hard-earned cash out of your retirement accounts. That might not be the best idea in the long run, however.
Some experts recommend that retirees wait as long as possible to begin taking distributions from qualified accounts to ensure their money will last throughout retirement.
Next: Letting old accounts languish...read more