When it comes to deciding how to take payouts from retirement accounts, Kiplinger's Magazine cites four mistakes that must be avoided and could be costly to a retiree.
- Withdrawing money too soon: Maybe a not so obvious fact are the strict rules surrounding IRA withdrawals before the age of 591/2. These rules permit a retiree to begin withdrawing funds from a 401k at age 55. This is known as the "55 and out" rule. The ability to take advantage of this option rests with each employer. Not surprisingly, all employers do not allow for a retiring employee to take advantage of the 55 and out distribution rule. Additionally, if the 401k is rolled into an IRA, an IRA holder can take what is known as 72(t) distributions. This distribution arrangement requires the IRA owner to take "substantially equal periodic payments" over his or her life expectancy. The payments must continue for five years or until the IRA owner reaches age 591/2, whichever is longer.
- Interrupting annual payments: If the 72(t) payments are stopped prior to meeting the term or age requirement, the IRA owner will owe penalties and interest on all payments taken up until the time they were stopped. More information on 72(t) distributions can be found at www.72t.net.
- Taking a check for rollover proceeds: If one decides to transfer a 401(k) to an IRA or another employer's 401(k), the check should be made payable to the new custodian. If the check is made payable to the account owner, the employer will withhold 20% for taxes and the owner will need to come up with that amount to fund the new target account. Otherwise, the 20% will be taxed and assessed a 10% early withdrawal penalty.
- Forgetting about your spouse: The article (link below) discusses the pros and cons of including ones spouse to receive survivor benefits. With the survivor benefit option selected, the retiree will likely receive a smaller benefit payout.
Four Costly Retirement Mistakes You Can't Afford To Make
Kipliner's Personal Finance
By: Mary Beth Franklin