Don’t Fall For these Retirement Plan Myths
Retirement plans are not like regular savings or investment accounts. They come
with tax incentives to encourage us to save and invest wisely in anticipation of our
golden years. And, along with these tax incentives comes a fair share of
government regulation. All the rules can lead to misunderstandings and myths
about retirement plans. Here are a few examples:
1. Your money has to stay in your 401(k) until you retire. In reality, the age at
which you’re free to withdraw funds from your 401(k), penalty-free, is 59
½. However, in general, you can take distributions before this age, but
you’ll have to pay a penalty. Under some circumstances, you may be able to
avoid a penalty by taking a hardship withdrawal, for example, to pay certain
medical or educational bills.
2. When designating a beneficiary, naming your estate is the way to go. The
truth is, designating your estate as beneficiary of your 401(k), IRA or other
retirement account might be the worst possible choice. Taking this route
can prevent your spouse from rolling over inherited retirement funds into
his or her account, and it can shorten the amount of time over which your
loved ones can withdraw funds from your plan. The result? A potentially
bigger income tax bill for those you leave behind, and an overall reduction
in the value of their inheritance.
3. Your Roth IRA can grow, tax-free, forever. One of the benefits of a Roth
IRA is that, since the contributions you make to the account are in after-tax
dollars, you’re not required to take withdrawals during your lifetime.
However, this applies only to you, and not to your beneficiaries. When your
beneficiaries inherit your Roth IRA, they’ll have to take minimum
distributions, based on an IRS formula.
4. After you reach age 701/2, the government dictates how much you’ll
withdraw from your IRA. This myth is partially true. Once you reach age 70
½, you’ll be required to take a minimum amount from your account each
year. This is called a Required Minimum Distribution(RMD). However, your
RMD is only a minimum; you’re allowed to take as much as you want, or
even cash out your entire account, at any time.
Believe it or not, your retirement accounts can have a huge impact on your
overall estate plan. You’ll want to talk to your estate planning attorney to
make sure your retirement plan and your estate plan work effectively
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