5 lessons new retirees learn the hard way

Retirement » 5 Lessons New Retirees Learn The Hard Way

Taxes and penalties can crack your nest egg
Taxes and penalties can crack your nest egg © bikeriderlondon/

Another difficult lesson new retirees may unknowingly face comes in the form of taxes and penalties associated with withdrawing retirement savings. Moriarty is still surprised at the number of new retirees who don't have withdrawal strategies.

"One client took an IRA withdrawal from her account instead of her husband's only to learn that because she had not reached age 59 1/2 yet, she had to pay a 10 percent penalty," Moriarty says. "An unnecessary expense a professional could have easily steered her away from since her husband was age 62 at the time."

Another common withdrawal mistake is taking a large individual retirement account distribution to pay off debt, such as a mortgage or home equity loan. "If you withdraw $50,000 or $75,000 to pay off your mortgage, you have to pay taxes like you earned it," says Certified Financial Planner professional D. Drummond Osborn, president of Osborn Wealth Management.

Osborn appreciates the desire for retirees to be mortgage-free, but says, "Depending on your tax bracket, taxes due could amount to as much as one-third of the total withdrawal."

Instead, he suggests new retirees consider stretching out larger withdrawals over two or more years to reduce the overall tax burden.


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