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Guest columnist
Ben Jacoby   Expert: Ben Jacoby
8 ways to mess up your retirement plan
Investing mistakes top the list, but there are plenty of ways to spoil your retirement plans
Guest columnist

8 retirement plan mistakes
Page | 1 | 2 |
 

4. Ignoring high fees
In some 401(k) plans, participants pay as much as 2 percent to 2.5 percent in expenses. These fees may be well hidden, but they still impair your return. Let's say you have $200,000 in a high-fee 401(k) plan. At a 2 percent expense level, it's costing you $4,000 a year. At a more reasonable 1 percent, your expenses are $2,000. Over many years, that difference, compounded and increasing as your assets grow, can cost you many tens of thousands of dollars.

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Do the research to see if your plan is fee heavy. If so, move your money to a rollover IRA, if allowed, as soon as possible -- and also make a case with your employer for changing investment plan providers.


5. Not filing IRS Form 8606 with nondeductible IRAs
If you make contributions to a traditional, nondeductible IRA, make sure you file this form with your tax return to establish the necessary verification trail that you'll need when you make withdrawals from that IRA. Otherwise, you may have to pay taxes on withdrawals that should rightly be tax-free since you didn't get a tax deduction when you made your contribution.

Also, keep in mind that you'll have a two-year window of opportunity to convert these assets to a Roth IRA regardless of your income level beginning in 2010. You'd have to pay taxes on your earnings, but then all future withdrawals would be tax-free, and you won't need to keep up with all that paperwork.

6. Believing you can't touch the principal in retirement
Suppose you plan to withdraw 5 percent a year from your plan once you're retired. Many people think that the 5 percent withdrawal can only come from interest and dividends, and therefore load up their plan with bonds, forgoing growth investments. They don't achieve an appropriate allocation.

As part of your annual withdrawals, you can also sell individual holdings and use the proceeds. Over the long term, a conservative balanced portfolio with some equity exposure should return about 7 percent to 8 percent a year. So 5 percent withdrawals are probably sustainable, with some portion coming from the sale of securities. You need to periodically rebalance your assets anyway, so these sales can be part of that process.

7. Assuming that net unrealized appreciation is always the best option
This tax break lets you remove company stock from your 401(k) plan. You pay ordinary income tax only on the cost (basis) of the shares when they first went into your 401(k), which may be much lower than the current market value. When you sell the stock, any additional appreciation is taxed at the long-term capital-gains tax rate.

It sounds appealing, but it's usually not a good idea. It's often better to simply roll the stock over into a traditional IRA and then sell it. The benefits of the tax-deferred buildup inside the IRA will generally outweigh the net unrealized appreciation, or NUA, tax break if the assets are left in your IRA long enough.

But this is not a decision that should be entered into lightly. Be sure to do the math with a competent accountant before taking any action.

8. Failing to update beneficiaries to reflect your current wishes
You designate beneficiaries when you open your plan. If you don't review your beneficiaries periodically, you might be leaving your assets to someone who is already deceased or no longer a part of your life. For instance, if you're divorced, you probably don't want to leave your money to your ex-spouse. But the plan administrator must distribute the funds to the listed beneficiaries. The beneficiary designation holds no matter what your will calls for.

Also, make sure that any special beneficiary instructions (such as defining the conditions of a trust that you wish to designate) are acceptable to and acknowledged by the plan fiduciary.

Bankrate.com's corrections policy -- Posted: Jan. 4, 2008
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