Retirement Plan Update. 4 Common Mistakes And How To Avoid Them.

Many investors in retirement plans are making mistakes that could literally cost them thousands, even tens of thousands of dollars.

Internal Revenue Code rules that determine how IRA’s, 401(k)’s and other retirement plans are taxed are complex. But, don’t take time to understand them and you could make unintentional, costly mistakes.

In this “Retirement Plan Update”, I’ll reveal 4 of these common mistakes and how to avoid them.

Mistake Number One Not Planning to Reduce Tax on Your Retirement Plan at Death

Do no planning to reduce or eliminate tax on your IRA at your death and you may force you heirs to pay up to 80-90% of your retirement plan balance in tax when they inherit it.

When combining the tax impact of I.R.D. taxes (income taxes on a deceased person’s IRA) and estate taxes, more of your IRA or 401(k) could be paid to the IRS at your death than is paid to your heirs. In fact, it’s not uncommon for the tax paid to the IRS to be 3 times the amount that your heirs are allowed to keep.

The good news is that many times with proper planning, this tax could be reduced or even eliminated altogether.

Mistake Number Two Not Using a Beneficiary Designation That Will Allow Your Heirs to Spread Out the Tax Over Their Lifetime.
Many IRA taxpayers miss this one. And force their heirs to do one of 2 things as a result when their retirement plan is inherited–

1- Pay all income taxes due on the retirement account immediately
2- Pay all the income taxes due on the retirement account within 5 years of inheriting the
retirement account.

These choices are not necessarily the best choices for many IRA holders. With proper planning it may be possible to allow your heirs to spread out the tax on the retirement plan that they inherit from you over their lifetime, or in other words, allow your heirs to ‘adopt’ your IRA.

The obvious benefit to this strategy, if you take time to implement it, is that your heirs have the ability to continue to get tax deferred growth of YOUR IRA account over THEIR lifetime.

While this strategy is available to almost any retirement plan investor, many aren’t even aware that it exists.

Mistake Number Three Not Using a Formula to Invest Your Retirement Plan Assets

Many successful investors use a 3-step formula to help them manage their IRA and retirement plan assets.

Step One: Use a systematic formula to determine what investments you buy and how much of them you buy.
Nobel prize winner, Harry Markowicz, came up with an idea called ‘Basic Portfolio Theory’. Simply put, Mr. Markowicz, determined that the best possible portfolio was an ‘efficient’ portfolio, or one that had the smallest possible risk for an expected level of return. In other words, you need to follow a formula to have a ‘blend’ of different types of investments to minimize risk, while maximizing return.

Step Two: Use a systematic formula to know when to buy and sell different investments in your portfolio.
By using a ‘rebalancing formula’ an investor may be able to ‘buy low’ and ‘sell high’, the ultimate goal of any investor. The problem is that many investors simply ‘let it ride’ and hope for the best. A rebalancing formula may allow an investor to systematically take profits.

Step Three: Use an exit strategy to protect your investments from major market downturns

May investors could improve returns through the simple use of an exit strategy. An exit strategy is nothing more than a clearly defined point at which an investor will sell their fund shares to potentially protect their capital from a decline.
Mistake Number Four- Procrastinating

This is likely the biggest and most frequent mistake people make. If you want to avoid these mistakes, you need to take a little bit of time out of your schedule and plan. The truth is with proper planning almost anyone can improve their financial situation.

Due to the complexities of retirement accounts and the many changes slated to occur, it’s extremely difficult to explain each application of these strategies here in print. While one client may be able to benefit from a strategy by using it one way, another client may be able to benefit from a different application of the same strategy.

If you or someone you know needs some help managing retirement assets, setting up a retirment savings plan, or have life insurance needs, just give me a call at 801-545-0696.

Respectfully,
Mark K. Lund, CRFA
Wealth Manager
Stonecreek Wealth Advisors, Inc.
10421 So. Jordan Gateway, Suite 600
So. Jordan, UT 84095
801-545-0696
www.stonecreekwealthadvisors.com
Securities offered through Sammons Securities Company, LLC
Member NASD and SIPC