It is human nature. We all make mistakes from time to time. But when it comes to your money, even small mistakes can cost you a lot, especially when it comes to individual retirement accounts (IRAs). Here are three common IRA rollover mistakes and how to avoid them:
# 1: Leave Assets in a Former Employer’s Retirement Plan
When you leave an employer, you generally have the right to roll over your entire vested balance to an IRA. Why would you want to do that? There are many reasons:
• By transferring your old retirement plan balance to an IRA, you gain access to a broader range of investment options.
• In the event of your death, your beneficiaries could receive distributions during their lifetime, allowing for a longer period of tax deferral.
• If you change your old retirement plan using a “direct roll-over,” you can avoid the mandatory 20% withholding for plan distributions.
You should seek the help of a qualified financial advisor to assist you in this process.
# 2: don’t name a beneficiary
If you have not named a beneficiary in your IRA, when you pass away, you will normally have to go through your estate. Your estate may have to go through probate, which can be expensive. Worse, the entire account balance may need to be distributed to the estate at the end of the fifth year after your death. This can cause a large tax bill, as well as loss of future tax-deferred growth for your beneficiaries.
Make sure to avoid mistakes by reviewing your documentation, including beneficiary designation forms, before beginning the transfer process.
# 3: don’t update beneficiary designations
You may have set up your IRA several years ago. Do you periodically review your beneficiary designations? Due to certain life events, such as marriage, divorce, birth of a child, or death of a beneficiary, you should periodically review your beneficiary designations. Have you updated your beneficiary designations lately? If you don’t make these changes, your retirement assets could go to the wrong people.
For many Americans, IRAs are one of the most important individual assets they own. Even a small mistake can prematurely disrupt the tax-deferred growth of IRAs that can be worth millions and create huge, unintended income tax bills for those who inherit them. If you are going to make a mistake, do so with caution and seek professional advice before reinvesting or transferring your assets.
