This article was published in the New Haven Register on April 15, 2018.
As you cruise toward retirement, watch out for expenses you may not see coming. There are a number of hidden fees, lurking penalties and unnecessary costs that can take a big bite out of your retirement savings. Here are a few retirement planning pitfalls to put on your radar:
Retirement income taxes. Many couples watch their retirement accounts rise with great satisfaction, calculating their net worth and figuring they are good to go. Often they fail to take into account the fact that taxes do not stop with retirement. Unless all your retirement accounts are in non-taxable vehicles such as Roth IRAs, the IRS will come for its share. You will pay income taxes on withdrawals from regular IRAs and 401(k) plans, as well as on income from most other sources. In regards to annuities that are not in IRA’s, you will pay tax on the gain but not on the original investment or “basis.”
High fees on retirement accounts. Do you understand the annual fees you are paying on your investment and retirement accounts, including your company 401(k) plan? Your expense ratio may be anywhere from 0.5 percent to 2 percent. The difference between one percent and 2 percent may not sound huge, but one percent of $200,000 is $2,000, a sum that adds up over 20 to 25 years. Paying more is OK as long as value is being added.
High costs associated with some annuities. Annuities are a type of insurance product that can be customized to fit your needs. They can be useful for people who already are maxed out on their IRA and 401(k) plan contributions. However, many annuity contracts feature high surrender fees and high commissions for the seller. They also can harbor annual insurance fees and other costs, so read all the fine print before signing an annuity contract.
Penalty for missing an RMD. If you have put aside money in an IRA or a 401(k) plan, you are required by law to start withdrawing some of those funds at age 701/2. This is called a Required Minimum Distribution (RMD), and it ensures that Uncle Sam gets his cut of your investment returns. Your RMD is based on a number of factors, and the percentage you must withdraw will increase with age, since one of the factors is life expectancy. If you miss taking an RMD, the government is displeased to the tune of a whopping 50 percent penalty, based on the amount you were supposed to withdraw. That’s on top of the taxes due. Planning tip: If you are still working at 701/2 and don’t own more than 5 percent of the business, you may be able to skip taking your RMD on the 401(k) assets while you are working. This is an area that you need your CPA’s guidance on along with your advisor as it is a minefield. Some 401(k) plans don’t allow for this and other work requirements apply. You have significant planning opportunities if you are working past 70!
It’s a good idea to consult a Certified Financial Planner to ensure that all of these areas of potential cost and benefits are taken into account within your overall financial planning. Most investors only get to retire one time so it makes sense to have a professional review your situation as you head toward days filled with fishing, golf, and time with those you cherish.